why retail fdi will kill jobs

8/3/2019 Why Retail Fdi Will Kill Jobs

1/7

Great Walmart of China & why FDI in retail will kill Indian jobs!Last updated on: January 5, 2012 09:13 IST

Walmart's entry into India will mean profits for

the Americans and jobs for the Chinese, saysMohan Guruswamy.

Foreign investment is invariably beneficial as itcreates jobs, adds value, and contributes to theGDP.Companies like Hyundai, Ford and Honda havebuilt a giant automobile industry in India nowproducing over 2 million cars and tens ofthousands of new jobs.By 2017 India will emerge as the third-largest car-making country in the world, producing over 7million automobiles. This would not be possiblewithout foreign investment, technology and

leadership.In sector after sector, foreign investment hascreated huge new capacities catering to domesticand foreign markets. The level of foreignownership makes no difference to the

contribution foreign companies make to the economy.Click NEXT to read on . . .


The desirability of foreign investment must neverbe questioned as long as it creates jobs, adds

value and contributes to development.And these are just the factors that go againstforeign direct investment in retail.Study after study in developed and developingcountries alike have shown that big box retailrather than creating jobs, destroy jobs.In fact their utility in developed economies is dueto the labour savings they achieve. This,combined with bulk buying and the recourse tomonopsonic (the opposite of monopoly)practices, results in pushing down producerprices, undoubtedly with resultant benefits to theconsumer.On the other hand, the more of a commoditylarge retailers purchase in bulk, the lower theprices growers of agricultural commodities obtain!Studies by FAO and Oxfam attest to this.Click NEXT to read on . . .


For instance, a decade ago coffee growers earned $10 billion from a global market of over $30 billion but now theyreceive less than $6 billion out of a global market $60 billion.The cocoa farmers of Ghana now receive only 3.9 per cent of the price of a typical milk chocolate bar but the retail marginhovers around 34.1 per cent.

Print this article

Page 1 of 7Great Walmart of China & why FDI in retail will kill Indian jobs! - Rediff.com

1/5/2012http://www.rediff.com/business/slide-show/slide-show-1-great-walmart-of-china-and-why-f...


2/7

A banana farmer in South America gets 5 per cent ofthe retail price of the banana while 34 per centaccrues to distribution and retail.The average size of a Walmart is about 100,000 sq ftand the average turnover of a store is about $53.2million, each employing about 300 workers. Theturnover per employee averages $175,000.Walmart has a 9 per cent return on assets, a 21 percent return on equity, and its CEO Michael Duke's

$35 million salary, when converted to an hourlywage, worked out to $16,826.92. In comparison tothis new employees are paid $8.75 an hour thatwould gross $13,650 a year.Click NEXT to read on . . .


By contrast the average Indian retailer had anannual turnover of Rs 330,000. Only 4 per cent ofthe 12 million retail outlets were larger than 500sq ft in size.India has 53 towns each with a population over 1million. If Walmart were to open an averageWalmart store in each of these cities and theyreached the average Walmart performance perstore -- we are looking at a total turnover of over

Rs 141,000 million with the employment merelyof about 16,000 persons. Extrapolating this withthe average trend in India, it would meandisplacing about 758,000 persons.Quite clearly Walmart is not going to create morejobs in India. On the contrary it will cause amassive loss of jobs in direct retail.This is the experience in the USA also. A 2004study by the Pennsylvania State Universityconcluded that counties with Walmart storessuffered increased poverty, and suggested that itcaused displacement of higher paid workers insmall family-owned retailers.

Another 2007 study has shown that towns in Nebraska with and without Walmart fared similarly different in terms ofjoblessness and poverty.

Click NEXT to read on . . .


A study of Walmart's expansion in Iowa found that 84 per cent of all sales at the new Walmart stores came at theexpense of existing businesses within the same county.The major argument in favour of the benefits a Walmart or Carrefour will bring centers on the perceived benefits toagriculture and better prices to the farmer.Empirical evidence from many countries, where big retail chains dominated, show that on the contrary farm realisationsactually decline.




3/7

A recent joint study in Finland by AgrifoodResearch Finland and Pellervo EconomicResearch Institute reveals that for each kilo of ryebread purchased in 2010, for which the consumerpaid 3.52 Euros, 1.24 went to the seller, while thegrower received only 14 cents.A further 1.74 Euros were shared by the millingcompany and logistics, while the rest went to thestate as taxes. The study also revealed that while

the trade got 19 per cent of the takings on food, itwent up to 29 per cent in 2009.Click NEXT to read on . . .


Finally, the study showed that food prices rosefaster than other consumer goods between 2000and 2010.Big business and MNC's like PepsiCo, Cargill,ConAgra and even ITC have been procuring foodgrains and farm produce for several years nowand there is no evidence that general prices haveincreased.Even where better prices were paid to contractfarmers, data available suggests that input costshave been higher.Simple economic logic tells us that nobody paysmore for a commodity that can be obtained forless. Business is about extracting profits and not

about charity.Protagonists of FDI in retail talk a lot aboutmodernising the supply chain. Consider this: TheNational Sample Survey relating to householdexpenditures reveals that fruits and vegetablesonly account for 9.88 per cent of urban householdexpenditure.Click NEXT to read on . . .


It is widely agreed that the supply chain that links the Indian producer to the domestic consumer is primitive, outmodedand wasteful. Many studies exist that detail the extent of wastage.




4/7

One will readily concede that large formatretailing with its capacity for bulk procurementand capital investment, even if it accounts for afraction of the retail trade in the sector, might beable to make some headway in modernising thesupply chain.But before we get into the 'for and against'argument vis-a-vis FDI, we must also ponderover the fact that a modern and nationwide

supply chain has been created, indigenously, formilk and milk products which account for 8.11 percent of household expenditure.Similarly, we have an effective supply chain forfood items such as cereals, pulses, and sugarand edible oils, which together account for 24.16per cent of household expenditure.All other non-food goods purchased by ourhouseholds such as tobacco products andalcohol, processed foods and snacks, toiletries,detergents, garments, etc, which togetheraccount for 52.57 per cent of all urban householdexpenditure, are made available for consumptionby modern and efficient supply chains.



Thus, what the average household does not get froma modern supply chain is a very small part of itspurchase. So the argument that the pro-FDI lobbyextends vis-a-vis of FDI in retail of modernising theentire supply chain is a bit exaggerated.The supply chain as it is now is mostly modernisedand efficient, and what is yet to be modernisedcovers only a very small part of urban householdconsumption.The argument then that we need the merchants of

the western world like Walmart to modernise just9.88 per cent of the supply chain is a bit bogus andself-serving.More than anything else it is Walmart's Chineseconnection that should cause us to worry.While Walmart has 352 stores in 130 Chinese citieswith a total turnover of $7.5 billion, Walmart directlybuys via its procurement centres at Shenzhen andDalian over $290 billion worth of goods from morethan 20,000 Chinese suppliers, 70 per cent of its2010 global turnover of $420 billion. (The Atlantic,December 2011 pp82).Click NEXT to read on . . .




5/7


If Walmart were a country it would be the fifthlargest exporter to the United States of America.This also suggests that Walmart's procurementfrom China is the major source of its profits.With its huge monopsonic power, Walmartactually depresses wages, by forcing suppliers tocut costs.A good example to demonstrate the low wages inthe Chinese labour market is contained in areport by Thomas Fuller in The InternationalHerald Tribune of August 3, 2006, whichinvestigated the percentage split in profit in theshoe industry between the Chinese factories andthose who market and sell the finished productsin the US and Europe.The factory owners after the laborious process ofmanufacturing makes a profit margin of 65 centsper pair of shoes, which are sold ex-factory for$15.30."A major US retailer, after factoring in shipping,

store rent and salaries, sells the boots for $49.99. Assuming a pretax profit margin of about 7 per cent, an average amonglarge US retailers, it earns $3.46 on the same pair of boots."



However the story doesn't end with the unfairprofit margins. The Chinese labourers, who makethe shoes, box them and even affix the price tag,are the ones who get the worst deal. TheInternational Herald Tribune says, "Yet for all thesweat that goes into making shoes in Tianjin, thefactory payroll is equivalent to $1.30 a pair, 2.6per cent of the US retail price."

Should the salary of every worker in the Chineseshoe factory be doubled, the retail price in the USwould merely go up from $49.99 to $51 or so.By keeping wages low without the protection oftrade unions, China is in effect subsidisingexports. What the flow of cheap Chinese goodsthrough the Walmart direct pipeline from Chinainto India will do to Indian companies, particularlythe SMEs can well be imagined.Even without Walmart, Indian SMEs are beingdriven out in sector after sector by cheap Chinese

imports. For instance, there is no light fittings industry left in India. Same for toys.One can well imagine what a Walmart pipeline will do to the hosiery and woollen goods manufacturers in Ludhiana andTiruppur.Click NEXT to read on . . .


The once-prosperous clock-making industry around Rajkot has almost entirely fled to China. Millions of jobs in thesemi-organised sector now stand threatened.Interestingly, in 1985, Sam Walton, the founder of Walmart was forced to say: "Something must be done by all of us in theretailing and manufacturing areas to reverse this serious threat of overseas imports to our free enterprise system. Ourcompany is firmly committed to the philosophy by buying everything possible from suppliers who manufacture theirproducts in the United States."Having said all this, one must concede that change is remorseless. The constant displacement of workers by machinesand methods is the story of the future.




6/7

Textile mills made most weavers redundant, justas robots in automobile manufacturing haverendered many workers as surplus. This is thestory in all sectors of manufacturing.While the future cannot be avoided there is noneed to hasten the pain. Big box retail will bringbenefits to many stakeholders; not the least beingthe state, which will see improved realisation oftaxes and the construction industry, which will be

called to build the new retail centres.Click NEXT to read on . . .


Better quality control and good managementmethods will spread into other sectors and downthe supply chain manufacturers will demand fromtheir suppliers what is demanded of them by theirbuyers.Many talk of the revolution in retail, butgovernments must be more concerned withrevolutions forming on the streets.There are ways of achieving the former whileavoiding the latter. Three simple suggestions totweak the policy on the anvil are:1. Insist that big box retailer's be foreign

exchange neutral. That is, they export as muchas they import.2. Restrict big box retailers to outside municipallimits and to satellite towns instead of restrictingthem to within the 53 cities with more than amillion people each. This will ease the urbanchaos and encourage people to move into lessexpensive housing outside the big cities.Click NEXT to read on . . .


3. And finally, why put limits on foreign equity holdings? Allow companies like Walmart to own 100 per cent of their

business in India. At the same time the government must insist that they bring in foreign loans to finance their entire capitalinvestments in India. This will enable Indian financial institutions and banks to remain within sectoral limits and to extendfinancial assistance to Indian retailers.Above all the policy-makers must realise that while it is an American corporation earning profits for its US shareholders,Walmart is mainly a retailer of Chinese goods. Its business model is quite unique.As Nick Robbins wrote in the context of the East India Company: "By controlling both ends of the chain, the company couldbuy cheap and sell dear."In this case it means profits for the Americans, jobs for the Chinese.The author can be reached at [email protected]




7/7

Source:


why retail fdi will kill jobs

Documents