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THE EFFECT OF CHINA’S NEW ECONOMIC REFORMS TO WALMART’S MARKET EXPANSION TO THE COUNTRY

Updated on June 13, 2014

Introduction

Walmart is the largest grocery retailer in the world established in 1962. Walmart, which is also regarded as the highest valued grocery globally, deals with a broad range of fresh food products. In its initial stages, The Company confined itself in US where it received intense competition from similar firms. The intense competition in the American market mandated the company to think of expanding and look for “greener pastures” in places where competition was not as high. By 1995, the company had already penetrated in 50 states of the U.S. The company decided to venture the global market in 2000 owing to their market saturation in America. As of 2012, Walmart stores were operating in such countries as Costa Rica, Canada, Argentina, El salvado, Honduras, Japan, India, Nicaragua, Puerto Rico, UK, US, Brazil and Chile (Zook, 2012).

According to Robert, (2013) Walmart is also focused on entering China market as part of its global expansion strategies. In fact, it has already drawn a plan of adding more than 110 stores in the next three years in order to increase its market base in the country. According to the company’s CEO, Mr. Doug McMillon, this decision was reached after seeing the potential for growth in country. This according to him, is depicted by a large population, which could in turn provide a huge market base plus the constant economic growth in the country. The purpose of this paper is to evaluate the anticipated risks and benefits of Walmart’s market entry to China owing to the newly introduced market reforms in the country.

The Risks Involved for Walmart In China Market

One of the effects of the newly introduced market reform in china is the liberal policy of the markets. In other words, the government will not be taking much focus on what is taking up in the market; rather, the market is left to regulate itself (Yao, and Blanchard, 2013). Among the demerits of this form of market system is that infrastructural systems such as rails, roads, electricity, street lighting and so on may not be maintained or improved. This is because businesses or companies are not be obligated to do the same. Again, failure of regulation may make some firms to employ dirty illegal schemes in order to outdo their competitors. Walmart will find this aspect challenging working in a business environment with poor legal and infrastructural standards. This is because they rely on efficient transport system for transporting their goods to reach the destinations in fresh conditions.

Another aspect to be noted is that free trade policy will ultimately lead to increased number of market players owing to removal of restrictions. This therefore means that although Walmart had moved from US due to intense competition, they must be ready to face the same issue in the new country of its expansion. Further, this policy will encourage dumping of goods which will subsequently cause the prices of goods to be low. Companies will be forced to sell their commodities at prices which may be below the cost of production if they want to keep on operating. Owing to these factors, the future of Walmart in China market does not look very promising.

How the Reform Impacts China’s Business Environment

As we have already noted, the reformation will see government control of the market system in China cease. Therefore, the market forces of demand and supply will not be affected by any policy. This means that market entrants will increase and products will be many. Since the players will be many, companies will have to sell their products at low prices, just to capture the market share.

On the other hand, the reform on land and residence registration to boost China’s urban population will see a great number of people moving to urban areas. This will in turn make the population in this places increase tremendously, and those at rural areas decrease. Businesses will therefore do better in urban areas since many people are concentrated in this places rather than in rural areas. Many large entities and factories will be placed in urban centers and therefore, concentrating the economy here. The urban land and resident registration reform will make it ideal for location of fast food businesses such as restaurants, groceries and other stores.

Also under the reform, commodity prices will be determined by the market and not controlled by the government or any other authority. The interaction of demand and supply determines the kind of price to be set on goods and services. Simply stated, prices are agreed on by buyers and sellers. However, this may not always be a fair dealing to either or both participants in a specific market. In other words, the buyers and sellers or either part may not always be satisfied on the dealings. Further, this will depend on the sellers or buyer’s competitive position in the market.

Potential Benefit of Walmart Expansion to China

First of all, Walmart will not encounter strict restrictions in China as the case of a regulated market. A part from removal of market restrictions, China has generally a policy of luring foreign investors in the country and their investment simple, hence as a first course, it will not find many obstacles in entering China market.

Another advantage, which Walmart will experience in this Chinese market, is the huge number of market for grocery products. This partly owes to the extensive population especially in the urban areas and the large number of people who prefer these products. In fact, according to media reports, China is currently above many countries including U.S in terms of grocery demand and this underscores the nation’s growing world dominance in economical terms.

We can also not leave aside the benefits of a free market system where they will enjoy autonomy concerning their operations in the country. In other words, there operations will not be interfered with, unlike the case of regulated markets. They will be able to set up stores in whatever location they so chooses within the country. The free market system will enable Walmart to succeed according to its potential. Again, the idea that Walmart will be allowed to set their own prices is to their advantage since they will have to set prices which they know will make them enjoy some profit. This would not have been the case had the government been responsible for such an issue. An organization is in a good position to set the right prices instead of the government since they know the cost of production and market demand and therefore set the price accordingly.


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    • Nyamweya profile image
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      Silas Nyamweya 3 years ago from Nairobi, Kenya

      Thank you HSchneider for y0ur comment

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      Howard Schneider 3 years ago from Parsippany, New Jersey

      Excellent and comprehensive Hub regarding the new Chinese economic reforms and Walmart. Walmart has become quite adept at navigating foreign trade and business rules while China wants its investments and jobs. Great job, Silas.

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