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A closing store in China.
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Wal-Mart is the latest company to badly overestimate China

By Max Nisen

One company you wouldn’t expect to stumble in China is Wal-Mart. It has juiced growth with cheap manufactured goods from the country for years. It had equally high hopes for China as a retail market. During the global recession, China offered a rare bright spot, showing big sales numbers and growth.

But it now seems that much of that growth was a mirage. A Bloomberg investigation dug into those positive numbers, and found that they were the product of some questionable accounting and sales practices.

An internal review by former Wal-Mart executive and Visa China head Stanford Lin in 2011 found widespread misconduct, including bulk sales to retailers, questionable accounting tactics that inflated sales figures, inventory pileups, pricing discrepancies, and other unethical practices. They combined to burnish profits without actually selling products to consumers. In fact, the company has been losing market share in China since 2009. 

“There is a general flexibility on ethics” Lin told Bloomberg. “There was a huge desire to perform. In this market, they believe if they’re hitting the numbers, then they’re doing the right thing.”

The practices may be unsavory, but they aren’t necessarily illegal. Several top managers left the company the year after the review, but unprofitable and unauthorized bulk sales continue to this day, according to the article. Wal-Mart said that pricing issues were investigated and found not to be material to its operations, but it did put in place new compliance procedures.

It’s a story that gets repeated over and over. A company enters China with high hopes, sees initial success and sets huge sales targets, only to be disappointed. The hype about the opportunity in China is enormous. Consultancies produce massive projections about the growth and spending power of China’s middle class, making it seem like a near endless and unmissable opportunity.

So often, the reality is different. A few months ago, Best Buy exited the country entirely after years of disappointing growth (paywall). BMW dealers in China are asking the company to lower what they see as overly aggressive sales targets.

Sales declined last quarter at Wal-Mart’s Chinese stores, and it’s closing low performers. The company expects more challenges ahead. That this happened to Wal-Mart seems particularly surprising, given its exceptional operating track record, and its mix of low priced commodity goods and slightly better stuff that should put it right in the sweet spot for China’s much hyped middle class. If Wal-Mart can’t manage to make money there, then who can?