Even as the issue of 100 per cent foreign direct investment in retail has set off a major controversy in India, the Chinese experience offers a refreshingly positive tale to tell.
Almost two decades after China opened up retail fully, starting with allowing 26 per cent FDI in 1992, the sector has seen rapid growth, against the backdrop of increased market consolidation, higher production efficiency enabled by rising investments in rural infrastructure, and booming exports made possible by the setting up of new supply chains.
Many of these changes, according to Chinese analysts, were made possible by the entry of foreign retail giants such as Walmart and Carrefour, who changed the way Chinese companies managed their businesses, from farm procurement to logistics. Yet, 20 years on, it is Chinese local retailers — and not their foreign competitors — who dominate the retail market, with initial fears of a foreign invasion ultimately appearing unfounded as local companies learned quickly to out-compete their foreign rivals.
The country's biggest retail firms today are all Chinese companies — the Shanghai Bailian group, Suning, Gome and Dashang — all have bigger sales than Walmart in China, according to several research studies.
Walmart, which came to China in 1996 and has since opened more than 350 stores, has seen its market share fall from 8 per cent to 5.5 per cent in the past three years, according to the China Market Research Group.
Shi Yongheng, a professor from the School of Economics and Management at Tsinghua University who has studied China's retail sector, told The Hindu in an interview that the success of China's local retailers was enabled by the government controlling the speed of the ‘gradual' opening up process, which gave local retailers enough time to adapt.
Foreign companies were allowed to hold 51 per cent majority ownership (which India has now decided to grant them) only 12 years after the sector was opened, first allowing 26 per cent foreign equity. Initially, China also only allowed foreign retailers to open in select metropolises, such as Beijing, Shanghai and Shenzhen, and, moreover, only in certain districts in those cities. In Beijing and Shanghai, foreign retailers like Walmart were only allowed to operate in districts where there were no local competitors. Through these ‘ invisible barriers', China succeeded in giving local retailers protection, while, at the same time, they learnt from the ‘more efficient' business models of foreign companies, said Professor Shi.
“In terms of logistics, procurement and management, we have clearly seen the benefits,” he said. “Prices have fallen, and efficiency has increased. Initially, we had fears of the coming of foreign companies, but now we are no longer concerned as local companies have been able to learn from them, and compete with them.”
The lessons for India from China's FDI experience are, however, both limited and mixed, considering the differences in how retail operates in both countries.
For one, it is unclear if India can pose the barriers that challenged foreign retailers in China, starting right from land — foreign retailers here have complained of not being given land by local governments, who control all land transactions, in prime locations. The unorganised retail sector is also far larger in India, with organised retail accounting for less than 5 per cent, compared with 20 per cent in China. In China, unorganised retail, represented by street vendors and neighbourhood ‘community retailers', has continued to thrive, offering cheaper prices than supermarkets and retail chains.
For farmers like Zhang Wei (named changed) from Hebei, who grows vegetables on a 10 mu (0.67 hectare) plot of land, the coming of retail has increased — not reduced — his client base, he said. Mr. Zhang has direct sales in a Beijing neighbourhood every evening, while also supplying a supermarket chain, which, he says, pays less for his produce. “My vegetables are cheaper than in the supermarket, so I will always have my customers,” he said.
Consolidation of the retail sector in China, as a result of the government-supported rise of local retail giants like Bailian, has put many small farmers, who, unlike Mr. Zhang, could not cope with lower prices, out of work.
It has, however, also improved productivity by increasing the size of landholdings. In Mr. Zhang's village, for instance, each household had between 1 and 2 mu, but as more farmers moved to the cities for work, they rented out their land to those, like Mr. Zhang, who stayed behind.
“The job losses have not been felt because of the pace of urbanisation and the growth of cities,” Professor Shi said. “Yes, some small retailers have lost their jobs, but the question is, have the benefits outweighed the costs? I would certainly say yes.”