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Hedrick Smith examines whether Wal-Mart, in its zeal to offer low-cost goods to shoppers, is the main force driving the production of American products to China (resulting in a decreased standard of living back home).

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00:00There's never been a company like it.
00:14Walmart is probably the broadest and most powerful company in U.S. business history.
00:20Its everyday low prices benefit millions of Americans.
00:24Walmart has really given an increase in income to every American.
00:29But some say it's a bad bargain.
00:32It's putting people out of work, that's what it's done.
00:35I'm gonna get 25, I'm gonna get 25, I'm gonna get 25, I'm gonna get 25, young man, 25, 30.
00:38Unfortunately, plants are shutting down of this caliber.
00:41Tonight, correspondent Hedrick Smith investigates how Walmart is changing the American economy.
00:47The Chinese guys bought the big machine?
00:49Following the trail of low prices in America to low-cost production in China.
00:54I said, hold it, hold it, hold it. The next one's China, I gotta get here.
00:58Tracking the nation's growing trade deficit.
01:00Walmart's our number one customer.
01:02Walmart's your number one customer?
01:03Number one customer.
01:05And examining the growing controversy over the Walmart way.
01:09The lowest prices have to lead to the lowest wages and to job loss and to lower living standards.
01:16Tonight on Frontline, is Walmart good for America?
01:23It's 6 a.m. at the University Arena in Fayetteville, Arkansas.
01:26It's 6 a.m. at the University Arena in Fayetteville, Arkansas.
01:28And the faithful are gathering.
01:29It's 6 a.m. at the University Arena in Fayetteville, Arkansas.
01:55And the faithful are gathering.
01:58They've come to cheer their home team.
02:00But this isn't your typical home team.
02:03Give me a W!
02:05W!
02:06Give me an L!
02:08A!
02:09Give me an L!
02:10L!
02:11Give me a squiggly!
02:13Squiggly!
02:14Squiggly!
02:16This is Team Walmart.
02:17And this is a shareholders meeting unlike any other.
02:21Team!
02:22Team!
02:23What's that spell?
02:24Walmart!
02:25Who's Walmart is it?
02:26I Walmart!
02:27Who's number one?
02:28The customer always move!
02:29And Walmart is a company unlike any other.
02:31Your company was the first company on the planet to report one quarter of a trillion dollars
02:46in sales.
02:47Two hundred and fifty-six billion dollars.
02:51Do you know what that is?
02:55That's one IBM, one Hewlett Packard, one Dell computer, one Microsoft, and one Cisco system.
03:05And oh, by the way, after that we've got two billion dollars left over.
03:10As the world's largest company, Walmart has tremendous power and influence.
03:15It is now the model not just for retailing, but for companies all across the corporate landscape.
03:25In the 19th century, it was the Pennsylvania Railroad, which called itself the standard of the world.
03:30Early 20th century, it might have been U.S. Steel.
03:33General Motors, of course, in the mid-20th century.
03:36But clearly, Walmart today is setting a sort of a new standards that other firms have to follow if they hope to compete.
03:45And more than just other firms, it's setting standards for the nation as a whole.
03:56By figuring out how to exploit two powerful forces that converged in the 90s,
04:01the rise of information technology, and the explosion of the global economy,
04:06Walmart has changed the balance of power in the world of business.
04:12It used to be that manufacturers, big multinational manufacturers, had the most power.
04:17Companies like General Motors and General Electric.
04:20Today, I think that global retailers actually have become the most powerful companies in the global economy.
04:29To understand Walmart and how a company with such humble roots has managed to build a global empire,
04:39I headed for Bentonville, Arkansas.
04:42It's an overgrown crossroads town, tucked into the Bible and barbecue belt of Northwest Arkansas.
04:48Here, in the heart of the old town, sits the five-and-dime store that Sam Walton opened in 1950.
04:58A few blocks away, I found the Walmart of today, the Walmart we've come to know as consumers,
05:10a cornucopia of thousands of different items all under one roof, the epitome of one-stop shopping.
05:17Every week, Walmart says 100 million American shoppers stream into its 3,400 stores.
05:28It's very convenient for me to be able to get a one-stop shop.
05:32I know I don't have to look and see where I can save the most money.
05:35I know when I come in here, I can save money.
05:37Good prices, good quality of stuff.
05:40I've been thinking about having my Social Security check direct deposit to Walmart, since I buy everything at Walmart.
05:50What makes Walmart successful, what keeps us motivated, and what really challenges us every day,
05:55whether it was from the day one when Walmart began or till today, I think it's the same,
05:59that we really strive in everything we do to keep our costs as low as possible
06:04so that we can provide the customer a value and still make a reasonable profit for us, for our company.
06:09That was Sam Walton's formula.
06:12Buy cheap, sell for less than the other guy, and make your profit on high volume and fast turnover.
06:19Sounds simple, but this supercenter is a world away from Sam's Five and Dime.
06:26How do they keep track of it all?
06:28How do they know what to stock?
06:30How do they keep prices so low?
06:34What I'm going to do is show you how we use this Telzon unit.
06:39Okay.
06:40Linda Dillman is Walmart's chief information officer.
06:42We have a display of flash lines.
06:44Right.
06:45And she let me in on one of Walmart's most important tools, a little gadget called a Telzon.
06:52It tells me the sale price of the item, how many I currently have, and it knows what the history looks like.
07:00We're tracking each sale as it occurs.
07:02We know what we think it'll do going forward based on its trend.
07:07Walmart was one of the first retailers to understand the power of information hidden in the barcode.
07:13This little barcode here is not just a simple thing, it's almost an encyclopedia of information.
07:18Absolutely.
07:19It allows us to tie this item to a lot of information we know about it that we can only collect because we have that barcode.
07:25How many items do you have in a store like this?
07:27Over 100,000, so close to 120,000 items.
07:30Walmart couldn't manage without the barcode.
07:34It helps them overcome one of retailing's thorniest problems, getting the right mix of products in the store.
07:41You can track sales on specific items, specific weeks, specific days, specific hours of the day.
07:46John Lehman worked at Walmart for 17 years.
07:49He managed six different stores.
07:51Disillusioned, he quit to go work for a union trying to organize Walmart workers.
07:56Track sales, spikes during the year, during certain seasonal periods.
08:01Clothes, sizes, colors, flavors, all of those things.
08:06It's just, it's really incredible.
08:09With its own supercomputer, Walmart streamlined its supply chain, speeding delivery from plant to store shelf.
08:17The sale's recorded, and then an order is automatically generated that evening at midnight.
08:23And that warehouse fills that order, and it's sitting back on the shelf the next night or the following night.
08:28Walmart became a world leader in logistics and promoted greater efficiency among its suppliers.
08:35Some analysts even credit Walmart with increasing U.S. productivity.
08:40Walmart, as an efficiency machine, has just done better than any other U.S. retailer or perhaps any other U.S. company in history.
08:49With other mass retail chains like Target and Kmart, Walmart generated a revolution in how goods are produced.
08:56A shift from what's called push production to pull production.
09:01The push system involves manufacturers deciding what they're going to produce and then trying to get retailers to buy it and sell it for them.
09:13The pull system involves retailers deciding what is being sold, collecting information on what is being sold,
09:22and then telling manufacturers what to produce and when to produce it based on what is actually being sold.
09:29Walmart's pull is so powerful that here in Bentonville, manufacturers have set up satellite sales offices.
09:37In what's now known as Venderville, I found a who's who of Walmart vendors.
09:44In one corporate office park, I found a sock manufacturer, Kentucky Derby Hosiery.
09:50Its CEO is Bill Nickel.
09:52Yes, if you want to sell Walmart, you know, you need to come to Bentonville.
09:57It's been that way for a long time. I don't see that that's going to change.
10:01So people who travel a lot found it maybe more convenient just to have an office here,
10:07that they were continuously coming to Bentonville.
10:10So a lot of them just moved here or at least opened an office here.
10:16The suppliers come in droves, hungry for big contracts.
10:21They get herded into little rooms for bargaining sessions with Walmart buyers.
10:27They force all of us by really good business discipline to be sure we're paying attention at all times to what their customers want to buy.
10:37It serves the purpose of saying this is what they want and they want to buy it at this price.
10:45Therefore, that's what we better be doing, our little company.
10:50The focus is on what matters most to Walmart, prices.
10:55Well, it's very one-sided. There is no negotiation. There's not much negotiation at all.
11:00The manufacturer walks into the room. I've been in these little cubicles. I've seen it happen.
11:04Buyer says, look, we want you to sell it to us for 5% on a dollar at cost, lower this year than you did last year.
11:12They know every fact and figure that these manufacturers have.
11:17They know their books, they know their costs, they know their business practices, everything.
11:22You know, so what's a manufacturer left to do?
11:25They sit naked in front of Walmart. You know, Walmart calls the shots.
11:29If you want to do business with us, if you want to stay in business, then you're going to do it our way.
11:34And it's all about driving down the cost of goods.
11:37The power of Walmart is such, it's reversed a 100-year history in which the manufacturer was powerful and the retailer was sort of the vassal.
11:47It's changed that, turned that around entirely.
11:49Now the retailer, the mass global retailer, that's the center, that's the power.
11:54And the manufacturer becomes the serf, the vassal, the underling who has to do the bidding of the retailer.
12:00That's a new thing.
12:07I wanted to see how this bold new world of retail power had changed the game for established brand name manufacturers.
12:14So I headed to Worcester, Ohio, a small college town and long-time home to one of America's best-known brands, Rubbermaid,
12:23maker of plastic pails, garbage cans and all kinds of containers.
12:29We were one of the best-known brand names in America because we were in virtually every home one way or another.
12:37Very, very impressive display here.
12:40Stanley Galt was CEO of Rubbermaid through the 1980s and early 90s.
12:45Galt bet Rubbermaid's future on supplying big-box discount chains like Walmart.
12:51The tea leaves said, you better be a part of this growing, of these growing new segments.
12:56They provide a tremendous opportunity for growth and for volume sales.
13:01And they can take a new product and make it a success overnight.
13:05One of Galt's rising lieutenants was Wolfgang Schmidt, who had later become CEO.
13:10Well, there was a dramatic shift over a relatively short period of time
13:14as we went from thousands of customers that we were selling to
13:17to where five or seven of our customers represented two-thirds of our volume.
13:20These big-box retailers.
13:22The big-box mass merchants.
13:23You have to have a very tight relationship with them, and you have to be important to them.
13:28No customer was more important to Galt than Walmart.
13:33When I came to Rubbermaid, they did not sell Walmart.
13:37They were selling Kmart, but they wouldn't sell Walmart.
13:42Well, within a short period of time, Walmart, really within a year, they were our largest customer.
13:48Tired of dragging your garbage to the end of the drive?
13:53Then roll it with a roughneck wheeled refuse container from Rubbermaid.
13:57Heavy-duty construction and...
13:58The Walmart account helped fuel Rubbermaid's rapid growth.
14:02Sales and profits soared.
14:05Rubbermaid, ideas that last.
14:08Its products were so highly regarded for quality that Rubbermaid was voted the nation's most admired company in 1994.
14:16It's really your peer group, the other manufacturers out there in the world, saying this is the company that is really doing it.
14:23They're doing all the things right, and they're doing the things that make them very admired.
14:29Our brand name, our quality, our product development.
14:32But behind the headlines, Rubbermaid was struggling to maintain its ambitious growth targets.
14:37Then suddenly it found itself in a showdown with its biggest customer.
14:42The price of resin skyrocketed.
14:45And resin is a huge component of any plastic product that you make.
14:51And when we went out with a price increase across the industry to all retailers,
14:58saying our raw material costs have increased significantly, we have to get a price increase for our products,
15:05Walmart would not take that price increase.
15:08They flat out refused to take the price increase.
15:11Other mass retailers agreed to a price hike.
15:14And Rubbermaid's CEO flew to Arkansas to ask Bill Fields, head of Walmart stores, to reconsider.
15:20They were very public in those days, as you might recall, as were a lot of retailers,
15:25about saying one of the advantages we as big box retailers have is we can put the hammer to the manufacturers
15:32and we can give American consumers lower prices.
15:35So did Fields put the hammer to you?
15:37Oh, in his own way, certainly.
15:39I thought it was a vindictive kind of meeting that said,
15:44yes, you may be Rubbermaid and you're a big Rubbermaid and you've got the great name and all that,
15:49but you're not going to tell us what to do.
15:52And we're not going to take your price increase and we really don't care what it does to you.
15:57So what does it mean to you?
15:58Do you lose shelf space?
15:59Do you lose volume to Walmart at that point?
16:02Sure.
16:03You know, when push comes to shove, their way of disciplining the supplier,
16:08is to show that, you know, volume can be given or be taken.
16:13And they dropped a number of our products for a couple years.
16:18Just drop those products.
16:21That impacts the company tremendously.
16:24To me, it was one of the first signs of the decline of Rubbermaid.
16:32I asked a Walmart spokesman about the clash with Rubbermaid because Bill Fields, no longer at Walmart, didn't answer Frontline's inquiries.
16:41Whatever happened there, I'm sorry, I can't comment because it predates me and I'm not familiar with the specifics.
16:47But I would just reemphasize that it is not our intent to be bullies as buyers to our suppliers.
16:56Walmart's pullback was a body blow to Rubbermaid.
16:59Coupled with lax management at Rubbermaid, it plunged the company into deep trouble.
17:05In 1999, Rubbermaid sold out to Newell, a major competitor.
17:11By the time I arrived in Worcester five years later, it had come to this.
17:1625, 25, 25, 25, young man, 25, 30.
17:19Rubbermaid oxing off its birthright.
17:2240, 40, 40, 45, 50, 50, 55.
17:29Where are the buyers from?
17:30They're from all over.
17:31We've got guys from all over to 50 states.
17:33We've got two guys in from South America, two guys from Italy, a guy from Spain, two guys from over in Japan or China area.
17:41We've got a guy from all over there.
17:43A couple of guys from China?
17:43Yeah.
17:44They're buying here?
17:45They're buying.
17:46They bought the one big machine today, yeah.
17:47The Chinese guys bought the big machine?
17:49It's an injection machine they bought, I believe, for $850,000.
17:54So Rubbermaid's original plant was closing shop,
17:57and countries like China were picking up the pieces.
18:01You know, when you think of Worcester, you think of Rubbermaid,
18:04and you think of Rubbermaid, you think of Worcester.
18:05I mean, this is what this town is all about.
18:08So what's it going to be without...
18:10You move all this stuff out, you've got a carcass here.
18:13Exactly.
18:14It's a town of Carcass, too.
18:15Well, there is about 1,000 jobs that were lost here.
18:17Yeah, close to 1,000 jobs.
18:19It seemed to me that it wasn't just a plant dying.
18:23A set of corporate values was passing away.
18:28Ten years ago, Rubbermaid, with its reputation for quality,
18:32was named most admired.
18:34Last year, Walmart, with its reputation for cost-cutting,
18:37was most admired.
18:39If you look at the shift from Rubbermaid as the most admired company in 1994
18:44and Walmart as the most admired company today,
18:46in terms of the larger American economy, what does that mean?
18:50What does that say about the touchstones of success?
18:53Rubbermaid represented an innovation-oriented high road towards U.S. competitiveness.
18:59I think Walmart represents a cost-driven, low-price, low road towards U.S. competitiveness.
19:06And in a sense, they're two dramatically different styles in which the U.S. economy can be organized.
19:13I think the Walmart model is winning out.
19:18Morning, associates.
19:19Need all available associates, all department managers.
19:23Back at the Supercenter in Bentonville, employees gather for the morning meeting.
19:26A daily ritual at 5,000 Walmart stores all over the world.
19:33It's part of the Walmart culture.
19:35Good morning, everybody!
19:36Good morning, Matt!
19:39Everybody doing all right?
19:41Okay, let's talk about sales.
19:43Hey, we had a pretty good day yesterday.
19:45We were up 6.5%.
19:46Meat was up 19.2% yesterday.
19:49Great job.
19:49It's a pep rally around Sam Walton's low-cost, low-price formula for success.
19:55Way to go!
19:57Who else has got an item?
19:5988 cents has an 85.23% mark.
20:03Woo!
20:03Great item, great item.
20:05They're a dollar and a half for 24 and a 30% mark.
20:09All right, good item.
20:1096 cents, Puritan socks.
20:13Pay close attention.
20:15What they're talking about is how Walmart pulls in millions of shoppers.
20:19By touting what it calls the opening price point.
20:22Awesome.
20:23And then we have simply basic socks for your dollar a buck with 94 cents.
20:27Awesome.
20:27We sell, in all the colors, we sell about 60 pairs a week.
20:30Okay.
20:31Opening price points are the rock-bottom prices that Walmart showcases in special displays.
20:37The $9.14 saucepan.
20:40Trick-or-treat jack-o-lanterns for 78 cents.
20:43The opening price point is clearly a foundation of who we are and how we interact with our customers.
20:49We feel that they need to have the best product, the best value, at the best price we can achieve.
20:56It's the heart of Walmart's pricing strategy.
21:00Walmart puts a tremendous amount of planning, organization, and thinking into what their opening price points are going to be,
21:08based on last year's sales, based on customer requests.
21:12Every line of goods has an opening price point, the cheapest item in the line.
21:17For example, this $29.87 microwave oven.
21:21It's a good price.
21:22But it's also the bait to lure customers to that department.
21:26Just to get you in, you look at that and you think, wow, what a great price.
21:30Then they got you because you walk about 10 more feet and you see the item you really want in that same category.
21:36Then you buy that item, but it's not going to be, probably, the lowest price in town.
21:40So are you saying that the opening price is the lowest price and actually will beat the competition,
21:46but maybe other items in the same category aren't necessarily the lowest price?
21:50No, absolutely not.
21:51Once you walk past that opening price point, they got you because you've already formed the perception
21:56that everything in that department is the lowest price in town.
22:00And maybe it's not.
22:01No, it's not.
22:02No, I can tell you it's not.
22:04I can tell you from experience it's not.
22:10Back in the 1950s, Sam Walton dreamed up the idea of an eye-popping opening price point.
22:18Sam had an old Ford pickup truck and he'd go down the road and buy ladies' panties
22:23and sell them at a ridiculously low price, you know, 10 for a buck or something like that.
22:29And it worked.
22:31Sam got a jump on bigger rivals by targeting territory they ignored,
22:36building his early stores near small towns in the south.
22:40One thing you have to think about in history about us is that we're a company
22:45that hasn't been that long ago that we were a regional player.
22:48What we found is we had to compete with, as a regional player, those that were national players.
22:55How do we do that?
22:56We had to go overseas to find products in some cases.
22:59In the 70s and 80s, Sam Walton would travel overseas looking for goods that would sell in our stores.
23:06Despite Walmart's much-publicized Buy American campaign in the late 80s,
23:11low-cost imports from Asia became a vital component of Walmart's low-opening price point strategy.
23:18They were more single-minded in terms of global cost-cutting and internal efficiency than any other U.S. retailer.
23:27And that helps us understand how and why they were able to pass companies like Kmart and Sears
23:34that were the early leaders in U.S. retailing and offshore sourcing.
23:38There was a lot of talk about those companies being asleep at the wheel,
23:42being fat, dumb, and happy, you know.
23:46And we didn't want to be fat, dumb, and happy. We wanted to be aggressive.
23:49And they were aggressive.
23:51From 38 stores in 1970, Walmart grew to 276 in 1980 and Mushroom to 1,500 in 1990.
24:01In 1991, it overtook its long-established rivals to become the nation's biggest retailer.
24:09Then, surprisingly, Walmart began having trouble.
24:12In 1992, Sam Walton died.
24:15And a year later, with the economy slow and sales sluggish, Walmart's stock price slumped badly.
24:21Walmart got very nervous.
24:24It got lower and lower, approaching that $20 mark.
24:27And that $20 mark seemed to be the, like, the threshold.
24:31If it gets down below $20, it's going to be a panic.
24:35Walmart's new management needed to crank up sales and profits, and they hit on a way to do both.
24:41I saw this as a store manager, an influx, a giant influx of imported merchandise coming in.
24:49The stores were inundated with inventory. Inundated.
24:53I mean, we had so much of this cheap crap floating around the store, we didn't know what to do with it.
24:58Lehman was so overwhelmed with merchandise that he called the vice president at Walmart headquarters to ask what was going on.
25:05He said, John, you know, we've got to bring our profit in for the quarter, for the month, for the year.
25:11And you know our stock price is declining.
25:14And you do understand, John, that these imports have a high margin, a high markup.
25:18And they're going to help your profit and loss statement.
25:20They're going to help the company's profit and loss statement.
25:24The impact was dramatic and immediate.
25:29The margins on the merchandise that were coming in from the Walmart import items were incredible.
25:33Yeah, 60, 70, 80 percent, you know, incredible.
25:38Compared with what, from American-made items?
25:41Well, compare that to an electric razor that you might be making 20 percent on, or 18 percent on, or 22 percent.
25:48So you're saying that Walmart is making much bigger profits on these items that are made in China or these low-wage countries.
25:56Is that right?
25:57That's absolutely right.
25:58By the late 90s, Walmart was dependent on low-cost Asian imports, and it began pushing its American suppliers to follow Walmart to Asia.
26:09Their message to us, surprisingly, is there's a broad market out there.
26:17If you want to focus on the lowest-cost part of the market, it's obvious that you can't do that in the United States.
26:24So if you want to play in that 25 percent of the Walmart market, you've got to be in a very low-cost place.
26:30China or someplace like China.
26:32That's correct.
26:33But China, practically speaking, is it.
26:36And a number of suppliers have told us that they have felt real strong, particularly opening price point pressure from Walmart that has effectively forced them to make decisions to move overseas, specifically to China.
26:50I don't know that that is a common practice.
26:52I don't know.
26:53I can't even confirm that that happened.
26:54I suspect that this is a legitimate occurrence that you're citing, and there may be some validity to that.
27:03The sad truth is, because of perhaps the pressure on price, because of this opening price point initiative that we and others have, and because the pressure of costs on the other side, that it's difficult to make ends meet, if you're a business, by staying here.
27:21You, as a producer of socks for 30, 40 years, are you now going to find that you need to put a production facility in China?
27:30Absolutely.
27:31For us to remain a viable company over the long run, we know we have to compete.
27:39Walmart basically tells its suppliers, we need to get those products at 30% lower price.
27:45You need to move to Asia.
27:46You need to move to China, because that will meet our bottom line price figures.
27:51Walmart was capitalizing on a watershed moment on the world stage, America's embrace of trade with China in the late 90s.
28:03With corporate America hailing China as the new economic frontier, President Clinton signed a permanent trade agreement with the Chinese.
28:11Our administration has negotiated an agreement which will open China's markets to American products made on American soil, everything from corn to chemicals to computers.
28:24The picture painted was that China was a big emerging market for U.S. exports, and that U.S. workers, and also U.S. companies, companies that made their products here, could profit tremendously from the opening of trade flows with such an enormous country like China.
28:43To see firsthand how the promise of a vast new market for America was playing out, I headed for China.
28:58And the heart of its new industrial revolution, Shenzhen, South China's miracle city.
29:1020 years ago, this was all rice fields.
29:13Today, it's a sophisticated city of 7 million.
29:17It's astonishing rise orchestrated by China's leaders and ignited by a Chinese currency devaluation in the mid-90s that dramatically lowered its export prices.
29:27It's the opening of China.
29:29China is a communist country, and for the longest time, they had closed doors.
29:34And when they opened up to Western businesses, the floodgates opened, basically.
29:39And it's something that you just can't stop.
29:42The boom seemed endless.
29:46North of Shenzhen, I found an entrepreneur who was among the first to spot opportunity in the new China.
29:53Well, these are the products we make.
29:55This gives you some idea of...
29:58Australian Donald Hay came to South China 20 years ago.
30:02I was in this part of the world, and I could see.
30:05I saw the cheap products come out of Japan, and I saw that market went to Korea, and then it went to Taiwan.
30:11I said, hold it, hold it, hold it.
30:12The next one's China.
30:13I've got to get here.
30:14The backbone of China's new industrial might is the flood of young Chinese pouring into this industrial province, an area no bigger than Missouri, now teeming with more than 40 million migrant workers.
30:29They come to work and live at the factories.
30:36At Hay's company, Heiko, they make $100 a month, or about 50 cents an hour.
30:43Other companies pay as little as 25 or 30 cents an hour.
30:46They want to work, they want to earn the money, they want to get forward, and they will do anything to move forward.
30:56Today, Heiko supplies electric toothbrushes and home cleaning products to big American companies like 3M, Procter & Gamble, and Walmart.
31:08What's happened is, the world has come here as a marketplace.
31:12It's like a supermarket for manufacturing today.
31:15And the quality is up to world standards and a long way past world standards.
31:20And that's just what's happened in southern China.
31:23All across the region, I saw evidence of the mass corporate migration into China.
31:31Highways lined with factories like airport hangars.
31:36Hundreds of billions of dollars in Western investment have poured into China in the past 20 years.
31:45And Walmart is here, too.
31:47It has 35 supercenters in China, and behind one of them here in Shenzhen.
31:52I found Walmart's Global Procurement Center, a huge buying operation, tapping directly into China's new workshop of the world.
32:01I interviewed people in Walmart's Global Procurement Center in Shenzhen.
32:07And I asked them about the total number of Walmart suppliers, and I was told that Walmart has 6,000 global suppliers.
32:17Eighty percent of those suppliers are in China.
32:22Several hundred employees work at the procurement center, keeping the import pipeline full.
32:29Walmart gives Chinese suppliers the specifications for Walmart products.
32:34And they teach those suppliers how to meet those specifications.
32:37They have to do with price.
32:38They have to do with quality.
32:40They have to do with delivery schedule.
32:41So, in a sense, Chinese suppliers learn how to export to the U.S. market through large retailers like Walmart.
32:49The Chinese suppliers also learned just how tough Walmart can be.
32:55Walmart is, they're very shrewd people.
32:57They know that they have the volume orders behind them, and they can go into a factory and almost demand, these are my list of demands, this is what I need.
33:06Kenneth Chan is a Hong Kong entrepreneur who used to supply Walmart.
33:12I've even heard sometimes that they will call in three or four manufacturers into one of their little negotiating booths and auction them off, say, this is what we want.
33:19Yeah, the big reverse auction kind of thing where they bid the price as low as possible.
33:23What do they do?
33:24Basically, they bring people into their offices and just put product in front of you and ask everybody to bid their costs on the product.
33:34And it's very high pressure.
33:39Have you ever been in that situation where you had to bid three or four people in the same room?
33:43Yeah, I have.
33:44Well, the things that I was involved in, they're very, very inexpensive, less than, like, they're probably, at the most, maybe less than a dollar.
33:52So they're pounding for a few pennies?
33:56Yeah, they're only pounding for, in a lot of cases, just one penny, in fact.
34:01Now, the argument is that this is getting a better deal for the consumer.
34:04Do you buy that, or do you say the consumer?
34:06No, it's getting a better deal for the retailer or the importer.
34:09For the Walmart?
34:10Yeah, for the Walmart, for the Targets, whoever does it.
34:14I'd heard about the Chinese producing cheap, low-end consumer goods.
34:17What was striking to me was how many Chinese companies were going high-tech.
34:26You may not have heard of TCL, but you've seen their TVs and maybe bought them, marketed under brand names like Philips and RCA.
34:36And you'll be hearing more from them soon.
34:41They have a wide range of modern electronic products.
34:45And they've just merged with French electronics giant, Thomson.
34:49Together, they're now the largest TV maker in the world.
34:52Ninety-nine percent of our exports are for North America and Europe, where we make a large part of our profit.
35:04We need to fulfill the demand of our foreign customers.
35:09And only one U.S. customer, it turns out, really matters to TCL.
35:15Selling to Walmart accounts for almost all our sales to the U.S. market.
35:19Walmart keeps a very low inventory and a fast turnaround, which forces us to speed up our production to catch up with the international market.
35:32It was a familiar refrain.
35:34I heard it everywhere.
35:36Ramping up production, supplying Walmart, shipping to America.
35:40And at Shenzhen's main port, I saw a river of exports.
35:47Ten years ago, this was all barren land.
35:52Today, Shenzhen is on the verge of becoming the third busiest port in the world.
35:57And Walmart is one of its biggest customers.
36:02Walmart has a very close relationship with China.
36:04China is the largest exporter to the U.S. economy in virtually all consumer goods categories.
36:12Walmart is the largest retailer in the U.S. economy in virtually all consumer goods categories.
36:18It sounds like a commercial marriage made in heaven.
36:21Walmart and China are a joint venture.
36:24And both are determined to dominate the U.S. economy as much as they can.
36:30Walmart estimates that it imports $15 billion of Chinese goods every year, and maybe a lot more.
36:42You've mentioned a figure of $15 billion, direct and indirect imports.
36:46Others have given us higher estimates, so well into the 20s, and maybe $30 billion.
36:51Is that possible?
36:53I think it's possible it could be higher and could be lower.
36:55The other thing you have to remember is that we're growing pretty significantly in terms of sales,
37:02so next year it will be higher, and the year after that it's likely to be higher as well.
37:07Walmart is providing a gateway into the American economy for overseas suppliers in China and elsewhere,
37:14and it's doing it on a scale that is unprecedented.
37:18At the other end of the pipeline, I visited the port of Long Beach in California.
37:38I wanted to see how Washington's promise of massive American-made exports to China was working out.
37:46The port's communications director is Yvonne Smith.
37:50What are they shipping in, and what are we shipping back?
37:52Well, we're bringing in consumer products.
37:55We're bringing in about $36 billion worth of machinery, toys, clothing, footwear.
38:04$36 billion right here in Long Beach.
38:06$36 billion comes through Long Beach from China alone.
38:09Consumer products.
38:11And what are we shipping back?
38:12We're shipping out about $3 billion worth of raw materials.
38:16We export cotton.
38:18We bring in clothing.
38:20We export hides.
38:21We bring in shoes.
38:24We export scrap metal.
38:26We bring back machinery.
38:28So they're doing all this.
38:30We're like a third-world country.
38:31We're exporting waste paper, containers full of waste paper.
38:35We bring back cardboard boxes with products inside.
38:41Add it all up, and the U.S. had a record $120 billion trade deficit with China last year.
38:48And it's headed even higher this year.
38:51The myth of an enormous and growing China market wound up locking the United States into a trading partnership with China
39:00that had to benefit China much more than it could benefit us.
39:04Because?
39:05And the reason was China would always be able to sell the United States much more goods than Americans could sell to Chinese,
39:13because Americans had the incomes that are needed to buy Chinese products.
39:18Chinese consumers, overwhelmingly, don't have the incomes needed to buy American products.
39:23So the whole idea was wrong.
39:26It was completely wrong.
39:27When you look at the growth of the trade deficit with China,
39:30you can say that a very conservative estimate is that we have lost more than a million jobs to China since the early 1990s.
39:37I think it's impossible to say that we've lost a million jobs to China.
39:40Trade policy or trade flows, one way or another, don't have an effect on overall employment numbers.
39:47They affect the kinds of jobs we have.
39:49And so some number of jobs have definitely been eliminated because of Chinese competition.
39:56Another elsewhere in the economy, other jobs have been created because of Chinese competition.
40:00Because American consumers have saved at Walmart buying Chinese goods,
40:04they've got more money in their pocket to buy something else,
40:06which creates business opportunities for those other businesses,
40:08which means they hire workers they would not have hired otherwise.
40:11The net effect, most economists think, is a wash.
40:15Theoretically, the gains from trade offset the losses from trade.
40:19But nothing says that there are more winners than losers.
40:22And nothing says that for the bottom three-fourths of America that they are net gainers.
40:28In fact, I believe that most people have been losers from trade.
40:31The impact of China's export boom has been felt all across the U.S.
40:44In towns like Circleville, Ohio.
40:49Population 13,000.
40:53A Norman Rockwell kind of town, with its farms and factories,
40:56a solid citadel of middle-class America.
40:59Former Republican Mayor Ron Wunsch has lived in Circleville all his adult life.
41:09The community basically generated its livelihood off of the industry that came into the community.
41:16It came in in the 1940s and 1950s.
41:19Thompson Consumer Electronics was the last large organization to join.
41:23That came in in the 1970s.
41:24So you had good living standards, good jobs.
41:28Good jobs, good living standards, and good people in the community.
41:32The French firm, Thompson, which manufactures TV sets, had the largest plant in town.
41:38And it was a top performer.
41:40The Circleville plant, in its heyday, probably around 1999, 2000,
41:44was producing about 10 million pieces a year for the production of television sets.
41:49They made the glass components, about 1,000 workers, highly motivated, highly productive, very efficient plant.
41:57And at the time, it was one of the most profitable contributors to Thompson's corporate bottom line.
42:02Steve Ratcliffe was among the 1,000 workers who rode the economic wave with Thompson.
42:08As a machine operator, he made up to $59,000 a year with overtime.
42:12I've done this job for the last 30, almost 31 years, and it's become my life.
42:18And it's the only thing I've ever known in my adult working career was that job.
42:23But from 2002 onward, the tide went out.
42:27Plants in Circleville started closing.
42:30And the big Thompson plant suddenly faced sharp foreign competition.
42:34We started to see more finished Chinese components coming into the market.
42:39A few brands come to mind, like Apex, that were selling at prices that most people couldn't even manufacture at, at the U.S.
42:45And they're being sold at the same place we all buy TVs, Best Buy, Circuit City, Walmart, and Sears.
42:51And, you know, all of a sudden, you have this end pressure on the retail price, driven largely by the Chinese producers.
42:59And oddly, Mayor Wunsch says, the Thompson plant ran into big trouble, not just because of the Chinese, but also an American company.
43:09In 2003, they lost a sizable portion of their total production orders from a particular customer.
43:20Sanyo?
43:21Sanyo, I believe.
43:22They lost the Sanyo contract because of what?
43:25My understanding, based on what I was told, was that an end-use retailer told the Sanyo people what they were going to pay for the TV.
43:37And who was that retailer?
43:38My understanding is that that was Walmart.
43:41Walmart's going to say, if you want our space, you're going to have to match the price or figure something else to do.
43:45And so it forces a supplier like Sanyo to go back upstream to the tube, and in our case, glass manufacturers, to look for price concessions.
43:53But sometimes they're not there.
43:54So if they're not there, then they go to China?
43:56Then they go to China or wherever they can to compete.
44:01Foreign competition hit other TV makers, too.
44:05In East Tennessee, I came across the very last American-owned TV maker desperately fighting to hang on.
44:13Well, it's a constant struggle to survive.
44:15I mean, it's a very competitive market.
44:17Right now, we've got about 750.
44:19Tom Hobson is president of Five Rivers Electronics, an assembler of brand names like Philips, Samsung, and RCA.
44:29With foreign imports dominating the small TV market, Hobson concentrated on high-end, big-screen sets.
44:37But even that was no protection from the Chinese.
44:40By the year 2003, they were, like, increased 1,100 percent in imports.
44:48So they just grew at an amazing rate.
44:52All of a sudden, they weren't here.
44:54They were shipping, you know, maybe 100,000.
44:57Now they're shipping millions and millions of televisions, all of a sudden, from China.
45:01In three short years, Chinese TV makers had grabbed one-third of the high-end market, about $350 million of business.
45:12But Hobson was convinced he was up against more than just free trade.
45:17You know, we're here to create jobs for our people in Greenville, Tennessee.
45:21And on a fair level playing field, if we can't compete, then we go out of business like anyone else.
45:28But if it's unfair and it's illegal and someone's doing something to damage and put these people out of a job,
45:35we're going to try to do something to keep these jobs.
45:38Hobson turned to Washington.
45:39He filed a trade complaint, charging the Chinese with dumping high-end TVs onto the American market,
45:46selling it below free market cost.
45:49It's not fair trade.
45:50It's not free trade.
45:52The Chinese are pricing their products in a manner contrary to the obligations they undertook
45:59when they joined the World Trade Organization a few years ago.
46:03The Chinese system has built-in advantages that no one else in the world has.
46:09Their currency is undervalued by, we estimate, about 40%.
46:13Their workers are not treated fairly in terms of worker rights.
46:18The government provides subsidies to Chinese producers at preferential interest rates that may not even have to be repaid.
46:28It's a rigged system.
46:30Chinese TV makers vigorously fought the case, including TCL.
46:36Tom Hobson was prepared to take on the Chinese, but stunned at whom else he had to fight.
46:43What side did Walmart come down on?
46:45Well, Walmart chose the side of the Chinese, and basically Walmart spent a lot of time and effort at the International Trade Commission hearings testifying against us and our case.
46:59When I asked a Walmart spokesman, he said he could not address this specific case.
47:05On the question of dumping, does Walmart have a position on dumping cases?
47:08I think we should weigh in if we feel a need, if there is an issue that we see that perhaps needs a perspective from the retail trade ourselves or if we're asked to.
47:20And do you see Walmart's position weighing in on behalf of the American manufacturers or on behalf of the foreign companies that are supplying it?
47:30I think it has to be a case-by-case basis.
47:31Why would an American company fight American companies and American jobs unless it was for their own profit?
47:39I don't understand that.
47:41Why would Walmart and other companies actually testify to support jobs in China instead of American jobs unless there was some benefit to them?
47:52Last April, Five Rivers won its case.
47:55The International Trade Commission determined that Chinese producers were illegally dumping high-end TVs on the U.S. market.
48:03It imposed new import duties, effectively raising Chinese prices and making Five Rivers more competitive.
48:12If you'd had a bad case or you'd lost this case, would you have shut down?
48:16Absolutely.
48:17There's no doubt in my mind that if we'd lost this case, this factory would not be in business.
48:23But it was already too late for other U.S.-based TV suppliers, like that Thompson plant in Circleville, Ohio.
48:32Last May, the plant was finally shut down.
48:36Did Thompson say that it was shutting the plant down because of competition from China?
48:40Exactly.
48:41They basically told us that they could buy the glass from their competitors coming out of China cheaper than what we could actually make it for at our plant.
48:53Suddenly, a thousand workers like Steve Ratcliffe lost the jobs of a lifetime.
48:59You kind of feel like you've been a failure in a way.
49:02You worry a lot.
49:03Like I said, I worry about whether or not I'll be able to find work with, you know, comparable wages and benefits and just what the future will be.
49:11Job opportunities for the kids coming out of high school in this area today are very much lower than they were 10 years ago.
49:20There are a lot of people in this community who have families that the father worked 30 or 40 years at the plant, then the son got employed, and the third generation has been employed at some of the plants.
49:30And those are gone now.
49:31And there's no opportunity for that.
49:33What are those high school kids going to do?
49:36We don't know.
49:39We don't know.
49:45Ironically, it may be Walmart to the rescue.
49:48One new job opportunity in Circleville will soon be a new Walmart supercenter that just broke ground on a patch of Ohio farmland right next door to the now-vacant Thompson TV plant.
50:02How would you feel about working for Walmart?
50:06I don't know where I'd really want to work for Walmart or not, to be honest.
50:10Walmart's a big contributor as far as bringing in a lot of the foreign products, the cheaper-made products and so forth.
50:17And quite frankly, that's some of what's going on right now with what put us out of business is the foreign competition.
50:24And for those who lost jobs at Thompson, Walmart jobs represent a steep cut in pay, almost half of the $15 to $16 an hour they made at Thompson, and a far cry from the pension, health care, and job security benefits long the norm in U.S. industry.
50:43Well, Joseph Schumpeter, who was an Austrian economist, famous, used the phrase creative destruction.
50:50What he meant was that one mode of production, one form of capitalist economics comes to the fore.
50:56It's more efficient.
50:57It's more powerful.
50:59It destroys, literally, other forms of production, other firms.
51:03And that's what Walmart has done.
51:05It is discovered with this low-wage model, with a technologically proficient, its global reach.
51:12It is a sort of new model of world capitalism, really, beginning in America and the rest of the world.
51:17And it is destroying, creatively, but nevertheless destroying, competitors and really other ways of thinking about the way the world works.
51:29Oh, say can you see?
51:34By the dawn's early...
51:36I guess my question for you is, is Walmart good for America?
51:39Is this strategy of Walmart good for America?
51:44I think Walmart is good for America.
51:46Walmart is doing what America is all about, the American market economy is all about,
51:52which is producing things consumers want to buy.
51:54And Walmart is offering consumers a wide range of goods at rock-bottom prices,
51:59and therefore it is meeting the market test.
52:03Give me a W!
52:04Give me an L!
52:05Give me an L!
52:06Give me an L!
52:07Well, if people were only consumers buying things, lower prices would be just good.
52:16But people also are workers who need to earn a decent standard of living.
52:20And the dynamics that create lower prices at Walmart and other places
52:24are also undercutting the ability of many, many workers to earn decent wages and benefits and have a stable life.
52:30We absolutely believe that we are raising the standard of living through lowering the cost of goods for people.
52:36There are those who criticize us and make assertions that there is somehow a negative to that.
52:43And it's a premise that I simply reject.
52:46I see skies so blue
52:49In the end, is Walmart good for America?
52:56If you want these low prices, then you go buy your products from Walmart.
53:00But what does that actually do for this country?
53:05It's putting people out of work.
53:07That's what it's done.
53:09And it's lowering our standard of living.
53:14That's the bottom line.
53:16Analysts estimate that Walmart would report record sales in 2005 of about $314 billion.
53:44And the 2005 U.S. trade deficit with China is expected to hit $205 billion.
54:03Next time on Frontline.
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