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Wal-Mart Puts India Plan on Hold Wal-Mart Drops Ambitious Expansion Plan for India
(about 7 hours later)
MUMBAI — Wal-Mart Stores ended its Indian joint venture on Wednesday and has put plans to open its own retail stores in the country on hold, saying strict government regulations on sourcing from local small businesses make it impossible. MUMBAI — Wal-Mart Stores gave up on India’s huge retailing market Wednesday, announcing that it had indefinitely delayed its once ambitious plans to open hundreds of superstores in its own brand across the country.
The decision by Wal-Mart Stores, the world’s largest retailer, represents a blow to India’s attempts to attract foreign investment in the huge but underdeveloped retail sector. Wal-Mart already runs a wholesaling joint venture in India and will continue that business, buying out its partner Bharti Enterprises. The announcement adds to the gloom concerning the Indian economy, which has suffered a sharp slowdown and a substantial slide in the value of the rupee in recent months. And it suggests that the government’s efforts to lure more foreign investment have not gone far enough, a blow to the governing United Progressive Alliance.
Despite India’s potential market of 1.2 billion people, no large foreign chains have formally applied to open multibrand retail stores since the government changed the law last year to allow them to invest more in the $400 billion sector previously reserved mostly for Indian companies. Wal-Mart, an American company that is the world’s largest retailer, also announced that it was ending its joint effort with Bharti Enterprises to operate 20 wholesale “cash-and-carry” stores that sell to other businesses like retailers, hotels and restaurants. Wal-Mart plans to buy out Bharti’s 50 percent stake in the venture, and the two companies will operate independent businesses in India. That Wal-Mart kept the wholesale business, long seen as a learning device for its larger entry into the retailing sector in India, suggests the company has not entirely ended its hopes of eventually tackling the country’s retailing market.
Wal-Mart’s Asia chief executive, Scott Price, said this week that the new law’s regulations requiring foreign retailers to buy 30 percent of products from local small and medium-size businesses are the “critical stumbling block” to opening its trademark consumer stores. The announcement Wednesday came after a senior executive said over the weekend that the joint venture was “not tenable.”
“I don’t understand how this 30 percent small and medium enterprise can be executed,” Mr. Price said in an interview Monday at the Asia-Pacific Economic Cooperation forum in Bali. Wal-Mart’s chief executive for Asia, Scott Price, said this week that the Indian government’s regulations requiring foreign retailers to buy 30 percent of products from local small and midsize businesses were the “critical stumbling block” to opening its trademark consumer stores.
He said that Indian retailers were not required to follow the same rule, which makes it too difficult to make money, because no enterprise small enough to meet the government’s requirements has the capability to produce on the scale that a giant retailer requires. “I don’t understand how this 30 percent small and medium enterprise can be executed,” Mr. Price said in an interview Monday at the Asia-Pacific Economic Cooperation forum in Bali, Indonesia, The Associated Press reported.
“If you were to look at any large scale, domestic retailer there is none can comply to a 30 percent SME rule,” Mr. Price said. He said that Indian retailers were not required to follow the same rule, which made it too difficult for outsiders to make money, because no enterprise small enough to meet the government’s requirements had the capability to produce on the scale that a giant retailer requires.
He added, “So it’s a bit of a level playing field issue here.” “For Wal-Mart, there has been frustration brewing for a long time about the obstacles to doing business in India and the changing configurations of what it could do and what it couldn’t do,” said Devangshu Dutta, chief executive of Third Eyesight, a Bangalore-based retail consulting firm. “To just continue to pump in money without reflecting on this would be pointless.”
Wal-Mart has long had trouble with its joint venture with Bharti Enterprises. Wal-Mart’s decision comes as American executives and politicians express growing impatience with India’s fitful efforts to open and modernize its economy. The government sought to address some of this frustration with a series of overhauls over the past year that ministers hoped would lead major international retailers to invest substantial sums in improving the country’s woeful retail infrastructure. So far, no company has.
In June, Bharti-Walmart’s chief executive left and was replaced. In November, the company suspended several workers as part of an internal corruption investigation. With national elections scheduled for next year, there is little hope that any new policy changes will be implemented any time soon. Looser rules implemented last September led an important regional political party to withdraw from the governing coalition, briefly threatening the coalition’s viability. India’s main opposition party, the Bharatiya Janata Party, has opposed efforts to loosen foreign investment rules. Critics say that Wal-Mart would put thousands of small retailers out of business, increasing unemployment.
In a joint statement Wednesday, Wal-Mart and Bharti Enterprises confirmed they would dissolve the partnership. “I don’t see any big foreign retailers entering the market at least for the next nine months, until after the general elections, when we know what the direction will be of the policy,” said Saloni Nangia, president of Technopak, a management consulting firm based in Gurgaon. “It is a wait and watch for many international retailers who want to be in India eventually.”
Wal-Mart will buy Bharti’s stake in the Best Price Modern Wholesale cash and carry business and continue to operate it in India. Bharti will take 100 percent ownership of the retailing joint venture Easyday. Each operation runs about 20 stores across India. Only 4 percent of India’s $500 billion retail market is controlled by large, Western-style chain stores. In China, the share is about 20 percent and in Brazil 36 percent. India’s tiny operators have few of the inventory controls of their larger brethren, and much of the country’s food spoils before reaching consumers — a heartbreaking reality in a nation where nearly half of all children are malnourished.
“Right now, India’s government is a mess,” said Ajay Shah, a professor at India’s National Institute of Public Finance and Policy.
Wal-Mart’s problems in India extend well beyond the government’s procurement rules. The Indian authorities are investigating whether Wal-Mart violated foreign investment rules by giving Bharti Retail an interest-free loan of $100 million that could later be converted into a controlling stake in the company. Both companies deny wrongdoing.
Last November, the joint venture between Wal-Mart and Bharti suspended several senior executives and delayed some store openings as part of an internal bribery investigation, one of a series of bribery investigations that have rocked Wal-Mart’s international operations. In June, the joint venture replaced its chief executive.
In 2007, Wal-Mart announced with great fanfare that it planned to open along with Bharti “hundreds” of stores, the kind of ambitious proposition that many international firms hatched early in the century as hopes blossomed that India would soon join China as an emerging economic colossus. But many of those same companies have quietly shelved their expansion plans after complex market conditions — fitful electricity, poor roads and government ineptitude — frustrated hopes of rapid profits.
Girish Kuber, a former political editor of The Economic Times, called the dissolution of the Wal-Mart and Bharti partnership “inevitable.”
“It is a sad story,” he said. “The reforms are going nowhere, and there is no investment coming in.”
Many foreign companies have found India’s endemic corruption difficult to keep out of their operations. Since U.S. law requires top executives to ensure that their international operations remain free of corruption, executives in the United States have taken an increasingly dim view of doing business in India, with its low profits and constant legal worries.
Neha Thirani Bagri contributed reporting from Mumbai, and Malavika Vyawahare from New Delhi.