Video: China’s retail revolution—An interview with Ed Chan
Wal-Mart China's CEO discusses the retailer's strategy in the world's most populous nation.
Todd Guild: There’s been a lot of discussion about the effects of the global recession and the role of China in its recovery. Can you tell us how has the slowdown affected Wal-Mart’s business plans in China?
Ed Chan: Last September, we were seeing some slowdown in spending in a small patch of China. I think this export slowdown probably kicked in slightly earlier than September. So, we were seeing in, for example, our Sam’s Club, our professional members—those who run restaurants, those who run hotels, those who run factories—they were becoming conservative. The first sign we saw was the big autumn festival back in 2008, when some members of Sam’s Club, [who] used to buy a lot of gifts for their trading partners or their employees, were buying a lot less.
There’s no doubt that China’s economy, given its reliance on exports, has been affected to a certain degree. But by and large, this economy is still, I think, growing at a pace that many other countries are somewhat jealous of. We look at China as one of the most interesting and good markets for Wal-Mart.
Todd Guild: Tell us about your direct reports and your leadership team in China.
Ed Chan: In China today—in our own operations, in our associate company Trust-Mart—all the stores are run by Chinese general managers. They are our very senior team members of the company. In terms of my direct reports, we have a very good mix of what I call global capability, but they work in China.
The one big characteristic of our team here is they all share the Wal-Mart values: how to save our customers money so they can live better. They all are passionate about China. They all are passionate about Wal-Mart in China. And they just love what they do.
Todd Guild: China is clearly characterized by its regional differences. What has Wal-Mart done to tailor its assortments and its formats to regional differences in China?
Ed Chan: We have learned so much about the diversity of the customer base in China. And the diversity will fall into different categories. This country is huge. From north to south, the geography implies a number of things. Number one: climate. Number two: differing customer preference. Number three: we can see the varied income level from the very rich coastal provinces, the megacities, to inland China, where income could be one-third or sometimes even one-quarter [of income levels in] the big megacities of Guangzhou, Shanghai, Shenzhen, and Beijing.
Todd Guild: What do you see in terms of the effects and the speed of the shift for retailers in online retailing and multichannel retailing in China?
Ed Chan: China probably has the largest [number of] Internet users officially or unofficially already. Second, it’s the country with the largest [number of] mobile-phone users. Internet and mobile—the combination of mobile and Internet—is a reality.
With these two, we know that online and e-commerce is a matter of time. They’re still small, but there’s no doubt in my mind that online e-commerce, multichannel, will be an important part of the retail consumer market in China in the years to come. I’m very excited about it. We don’t have an online business yet, but these foundations of Internet usage and mobile technology will no doubt create a huge market in that space for any consumer company.
The other aspect of development is what I’m seeing in the fascinating infrastructure development in China. We all know about the highway density in China. It’s probably approaching the US already. We know the number of high-quality airports in China. What’s also amazing is the rapid build-up of definitely the most sophisticated and the biggest railroad network in China.
When you have all these infrastructure investments coming onstream, and then when you combine it with the technology—Internet usage, new-generation mobile phones—I think, with these developments in China, I won’t be surprised that the consumer technology, the infrastructure, will all blend together to create once-in-a-lifetime opportunities for companies who understand how to tap into this.
The IT industry and innovation The IT industry has actually lost its ability to innovate. And I think pretty hard about this and about why. In the late ’80s, with some of my mentors, they would be really heavily involved with the senior leadership of many of the big IT companies, whether it was IBM or whoever. We used to cocreate and codesign chips with IBM way back in the late ’80s. I think when the CIOs got together and we really kind of started to push standardization, to basically drive operational excellence, we trimmed down that IT industry, the suppliers, and we also kind of pushed them into a commodity world. And I think that has slowed down innovation. If you look at the joint-venture capital, it used to be invested really heavily in IT firms or small IT firms. You don’t see it much anymore. And actually, if you get a successful small IT firm that starts to emerge, it gets eaten up pretty quick. And so some of that innovation, I think, over the years has evaporated. My belief is we can get it back, and we need to get it back. But it’s going to take more collaboration from the IT industry. I think the financial crisis is also pushing the boundaries of these companies, which I also think is healthy—that they’re getting into each other’s space because they’re trying to take things like cloud [computing] and the next-generation data center and some of these things to try to figure out, “OK, so how is this market going to shake itself out?” I think that will get them talking to each other more than they have. But I think it’ll raise competition, which is good for all of us. The potential of cloud computing I’ve learned through many scars that there’s this massive hype phase. But the industry can’t be pouring as much money as we’re pouring into it for there not to be something there. We think virtualization is absolutely spot-on. I mean, what we’re doing with T-Systems, putting all our SAP systems in their virtual piece, which is kind of a cloud—a first iteration of the cloud—has been great. It allows us to do peak-and-valley performance. On our HR system, it has been absolutely fabulous. If you think of the perfect-use case, it is in HR. You have segments of time where you do huge activity: at the end of the year, you do performance reviews; in March, we pay people because of bonuses and other things. If we didn’t have it in that virtual environment, we’d have to scope our landscapes and our performance to meet the peak load. And when we’re not at peak, we waste money. In the new model, we just ride virtualization. We optimize for the peak and we optimize for the valley. So there’s value here, you just have to be selective and a little bit patient. 3 Managing the long life cycle of IT projects A lot of the projects that we do now are large, multiyear global projects. Some of them last four or five years. So what you have to do is you have to peel apart against the competitive landscape: where is everybody in their technology-investment cycle? Everybody goes through these seven- to ten-year cycles, I call them. And the challenge on the project side is, “So where am I versus Exxon?” If I look at investment in a desktop and the end-user computing, you can look at the spend level, but I don’t know if Exxon Mobil is harvesting and I’m investing. Then the second thing on top of projects is, am I doing it differently than my competitor? Am I introducing a capability that’s different, and why? So that’s what I always ask: am I introducing a capability, and why? Is it a waste, or is it really a differentiator? What we want to do is have much better competitive information. What are our competitors doing? Or, what are others in the industry doing? And what I’m really interested in is not that we’re doing the same—because in IT we all follow each other, right? It’s the pack mentality—what we’re really interested in is, where are we different, and, more importantly, why? What happens to some CIOs is, it’s heavy lifting. You do a two- or three-year program and you get to the end of it and then you don’t refresh and say, “OK, what’s next?” In a large global organization like Shell IT, people can’t really think [ahead] more than two to three years. And so that’s why you see me break things up into phases and almost refresh what we want to do every two to three years.
