Walmart's China Problems Are Not Unique (WMT, YUM, AAPL, NKE, CRRFY, GUCG)

The US Senate has passed legislation that could make it easier for the Treasury Department to hit China with sanctions as a currency manipulator. China’s response, so far, has been to tell the US to mind its own business. But perhaps there could be something more subtle going on.

The president and a senior vice-president of the Chinese operations of Wal-Mart Stores Inc. (NYSE: WMT) have resigned in the wake of a recent labelling scandal in 13 of the retailers stores in Chongqing. This is just one of several current or recent complaints against foreign companies in China.

Last year 10 workers at a Foxconn plant that makes products for Apple Inc. (NASDAQ: AAPL) died, some from suicide. Part of Foxconn’s response was to install nets around the outside of dormitories. Apple later admitted that 137 workers in China were poisoned and that many often worked in unsafe conditions.

Nike Inc. (NYSE: NKE), Yum! Brands Inc. (NYSE: YUM), French grocer Carrefour S.A. (OTC: CRRFY), and Gucci Group NV (OTC: GUCG) have also been hit with investigations of their business practices.

Walmart has been fined more than $400,000 for labelling ordinary pork as organic, and a Chongquing official has said that this was not an isolated case, “but a reflection of the company’s dysfunctional management mechanism.” Walmart and Carrefour were fined a total of about $1.5 million in February for deceptive pricing.

Yum’s KFC stores admitted selling soybean milk made from powder at a premium price to consumers who thought they were getting the beverage from freshly ground beans. Nike is investigating a charge that it advertised one type of basketball shoe but delivered a different, lower quality shoe. Gucci has been saddled with complaints of “inhuman” working conditions at its Shenzhen store.

Bloomberg published an AP story last week suggesting that the reaction to Walmart’s mis-labeled pork was excessive and is likely linked to the city’s communist party chairman’s grab for power. And it is possible to speculate that the crackdowns may be used as retaliation for US moves to force China to revalue its currency.

Walmart has been the focus of 21 investigations over the past 5 years and the problems that Apple and others have had at Foxconn are now more than a year and a half old. Any direct correlation between US currency policy and recent investigations of foreign firms operating in China is only tenuous at best because the investigations have been going on for a fairly long time.

Tougher enforcement of labelling laws, workplace regulations, and food safety laws are popular with ordinary citizens everywhere, and the Chinese are no different. Two men found guilty of lacing powdered milk with melamine were executed in 2009 after six children died and nearly 300,000 people were sickened.

While it’s unlikely that China’s government would harass US companies over the currency issue, it is conceivable that the government could use the safety issues and questionable business practices to cause US firms operating in China some serious public relations problems and to have some impact on the firms’ bottom lines. The firms will then put pressure on the US government to back off the currency issue because it is hurting their business in China.

It is a near certainty that Chinese regulators will get more active in tracking down safety violations and operations violations like the mis-labeling of pork. It’s a domestic political winner, which is important in the provinces, and its a lever for the central government to use internationally.

Paul Ausick