By Christopher Tang (UCLA) and Brian Yeh (UCLA)
As China's population and economy continues to grow, the demand for food is surging correspondingly. After an attempt to become grain-independent (at the expense of other crops) failed in 2000, China became a net importer of grain and the price of food has increased sharply in recent years. Concurrently, the supply chain of fresh fruits and produce in China was highly inefficient because: (1) transportation infrastructure is highly complex; (2) small farmers produce crops using traditional methods that lead to lower yields and lower quality; (3) middlemen along the supply chain jacking up the trading price without adding value. To better compete on price and quality (in terms of freshness and nutritional value), Walmart in China launched its Direct Farm initiative in 2007 that was intended to ensure a stable supply of fresh produce at low cost within China.
At the core of this initiative is a desire to align the incentives of every player in the supply chain to cleanly and cheaply produce fresh fruits and produce that the market demands. Recognizing this and adjusting their approach was a key driver of Walmart's rapid growth in China. Each superstore functioned as a small distribution center and sourced its fresh wares from the local merchants. Walmart worked hand-in-hand with small farmers to rapidly upgrade their farming practices, including acceptable use of fertilizers and pesticides. Those that met certain standards could be certified at higher levels such as "green" and "organic", commanding higher margins. In addition to this training, Walmart also guaranteed the farmers a known price, cutting out all middlemen in the process.
With both Walmart's needs and those of the farmers met, it is important to remember that another impetus behind decision making in China is the government. With central control over what agricultural products to focus on, they wielded absolute power over the farmers' field. Walmart worked with the Ministries of Agriculture and Commerce to ensure that the government would support its efforts at expansion. Ironically, working in a communist system made the alignment of the farmers easier than it could have been. (As a counterpoint, a similar strategy was attempted in India, but did not meet with as much success due to the lack of ultimate decision making power at the farmers' level.)
By 2012, Walmart engaged over 800,000 small farmers in this China initiative. Its long-term goal is to reach up to 2 million and as a result, reduce waste by 15% by 2015. While this initiative was a huge success, one wonders what the effects will be if other giants such as Carrefour and Tesco follow suit in China. As these giants compete, the Chinese farmers may stand a chance of winning higher prices for their wares! As a metaphor, let us recall a Chinese proverb that goes as follows:
A clam was on the beach basking in the sun when a snipe came to eat it. The clam quickly closed his shell latching onto the snipe's beak. The snipe said, "It won't rain today and it won't rain tomorrow, then you will dry out and die". The clam replied to the snipe, "Your beak won't be unlatched today and it won't be unlatched tomorrow, then you will starve to death". Neither the snipe nor the clam would give up. In the end, they were both caught by a fisherman and taken away.
When two parties engage in competition, there is a chance that the bystander can become the winner!