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Are Walmart's Chinese Factories As Bad As Apple's?

Our fiction-free investigation finds that in many cases, the company's auditors are asleep on the job.

Chao recalled one case at Walmart when his boss received a confidential tip about a toy supplier outsourcing production to a strange location. Chao and a colleague staked out the supplier. When a truck emerged, they jumped into a waiting taxi and tailed it until the truck pulled into a prison. Upon further investigation, Chao confirmed that the factory was using inmate labor and got Walmart to pull its orders from the supplier.

He told me that story not to trumpet his or Walmart's detective skills—he said the auditors likely missed many more shadow factories than they caught—but to stress the slippery nature of the supply chain. Walmart's American brass, Chao said, doesn't have a complete enough understanding of Chinese manufacturing. "They have the basic concept, but the top management knows nothing about how to make it work" at the ground level, he said. "So they can say, 'Oh, a sustainability program,' but they can do nothing."

Chao isn't the only one to question Walmart's auditing. In 2009, the advocacy group China Labor Watch obtained documents from a Walmart packaging supplier on how to hide or adjust safety and environmental records; how workers should lie to auditors about wages, benefits, and working hours; and how to conceal a shadow factory. Another investigation by the group uncovered forced overtime, phony pay stubs, poor living conditions, and the use of hazardous chemicals at a Walmart shoe factory. Walmart-hired auditors had previously raised no concerns with either plant.

Li Qiang, China Labor Watch's executive director, told me that Walmart's auditing process has been plagued with fraud for years. In 2007, Li, who says he's met with Walmart officials numerous times, urged the retailer to scrap its corruption-riddled internal auditing program. Walmart followed his advice, but Li discovered that the problems hadn't disappeared. In November 2011, a lawsuit filed by Li's group against Intertek, an international third-party auditing company, describes how in December 2009 an Intertek auditor took a bribe from a Dongguan toy factory while overlooking "extensive fraud" in pay and hours records. (An Intertek spokeswoman said the suit "has no merit" but declined to comment on specific allegations.) In its 2011 Global Responsibility Report, Walmart briefly hinted at this problem: "Lack of complete transparency to production practices [in China] has hindered our ability to implement meaningful change at the factory level."

Li said these problems were systemic. "If the fraud in the auditing system isn't solved," he told me, "I'm far from optimistic about Walmart's environmental programs."

Thirty years ago, Shenzhen was a drab fishing village on the South China Sea, a place so remote it didn't have a single traffic light. Then, as part of his economic reforms, Communist Party leader Deng Xiaopeng named Shenzhen the country's first "special economic zone," with laissez-faire trade policies and favorable manufacturing laws put in place to lure foreign investment. Shenzhen's economy exploded, its GDP climbing from $31 million in 1979 to $107.8 billion in 2007. Today Shenzhen is China's third-largest port city, packed with skyscrapers, nightclubs, and fancy hotels. Among the most luxurious is the Shangri-La, where, on any given morning, buyers for American retailers mill around the marble-floored lobby waiting for rides to factories. I sat down in the bar one Friday and ordered a cappuccino that arrived with the letters "S-L" spelled in froth.

I was there to meet Terry Foecke (pronounced FAKE-ee), a consultant spearheading Walmart's factory energy efficiency program in China. In a lobby full of Westerners, Foecke cut an unmistakable figure—thickly bearded, 6-foot-3, with a broad belly and hip square-framed glasses. He was an unlikely Walmart ally: a soft-spoken, almost professorial progressive who quoted George Bernard Shaw and told me he spoke out against runaway consumerism at his Unitarian church back home in Minnesota.

Most of the 200 factories in Walmart's auditing program were simply those whose owners had volunteered. 

Foecke's actual employer was the Environmental Defense Fund, which in 2008 partnered with Walmart on the campaign to make factories more energy efficient. That degree of separation gave him the freedom to talk openly about implementing one of the retailer's most ambitious efforts: shrinking energy usage by 20 percent at 200 Chinese suppliers by 2012, the same program Mr. Ou had participated in. Foecke spent many days on the road, visiting factories and performing "rapid assessments"—two- or three-hour sweeps through a factory to pick out quick and easy ways to save energy and money. Foecke and his crack team of sleuths could find up to 60 percent in energy savings in a single visit, pulling down banks of lights that illuminated empty space or plugging leaky equipment.

Foecke wanted me to ride along on one of his assessments. But Walmart officials denied multiple requests to do so, and so I had to settle for Foecke's colorful written accounts. Here he is walking through an aging factory that makes plastic Christmas trees and other fake flora:

"Then it was on to the plastic injection molders. Wow, I thought I had stumbled into Mr. Wizard's Wayback Machine and somebody dialed in '1960.' Wide-open hoppers (hard to keep the polymer dry that way; causes lot of rejects), leaking hydraulics bandaged up with rags; filthy motors everywhere, and more compressed air than I believe I have yet seen used. They have 50-60 smaller molders crammed into the space someone in [Minnesota] would use for a 3-car garage, all actuated with compressed air instead of hydraulics, making bark and twigs and stems and such, sometimes even co-molding a stem onto a previously-made flower. P admitted later that the place made him jumpy, certified safety engineer that he is. The lack of safety guards and [emergency fail-safe] switches and doors and just plain space WAS impressive in a how-do-they-do-it? way. I got speared in the belly by an actuator, but in my defense the darn thing traveled a good foot into the manway."

But there were flaws with Foecke's program. Walmart said the participants in it were "top" suppliers, suggesting they had been chosen for their size. In fact, most of the 200 participating factories were simply those whose forward-thinking owners, like Mr. Ou, had volunteered, Foecke said. (And, of course, none of the 200 were shadow factories.) Also, the data in Foecke's program were self-reported. Foecke said he'd accepted Walmart's "inspire, not require" philosophy at the outset. Once Walmart expanded the program, he hoped it'd make energy metering mandatory. Otherwise, he explained, "the factories can say whatever they want, and when you have self-reported data it's built on sand. I said [to Walmart], 'You can do this for a while, but eventually cut the crap.'"

Yet two years into the program, well past the point where Foecke had expected it to be expanded dramatically, it was still stuck in the pilot phase. He'd seen similar hesitance on environmental issues at other companies, and that had usually spelled doom for energy efficiency programs. "It happens all the time," he said. "You go into big organizations, you get atomic decay, and unless there's something else there that drags it to the next level and starts integrating it, it becomes the flavor of the month."

A casual reader of the business pages could pinpoint the source of Walmart's hesitation. From 2009 to 2011, Walmart suffered seven straight quarters of declining sales in its US stores, a historic slump blamed on anemic job growth, weak demand, and high gas prices. Walmart responded by unveiling "It's Back," a plan to reclaim its original, bargain-seeking customer base by restocking 8,500 down-home products it had axed in an effort to declutter its shelves and class up its image. It also revived the popular "Action Alley," steeply discounted pallets of merchandise stacked up in the middle of the aisles. "It's Back" left suppliers and environmental partners wondering if this doubling-down on its crusade to be the cheapest retailer around might come at the expense of sustainability.

One insider who watched this unfold was Michelle Mauthe Harvey, an expert and EDF staffer. In 2007, Harvey opened EDF's office in Bentonville, the Ozark country town that is home to Walmart's headquarters. Bentonville was the site of Sam Walton's first store, a five-and-dime that opened in 1951. In the decades that followed, Walmart transformed the town into a thriving international business hub. At least 750 companies that do business with Walmart have offices in the area, from Procter & Gamble to Levi Strauss to DreamWorks. Cushy subdivisions ring the town, and both the median household income and average home value easily outpace the state average.

On a blisteringly hot summer day last June, I met Harvey over brisket and sweet tea at Whole Hog Café, a barbecue joint near the Walmart headquarters. Harvey is embedded inside Walmart, attending internal meetings and interacting with key players. She lauded Walmart for its ambitious goals but winced when I brought up "It's Back" and what it meant for sustainability. She said this roll-back initiative led some suppliers to think Walmart was stalling on sustainability as it grappled with slumping sales. "What's been concerning to us is the number of people who contact us and say, 'Is Walmart still interested in sustainability?'" She added, "There are still those [inside Walmart] who fall into the annoyed camp, who aren't entirely sure it's really necessary."

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