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Monday, October 16, 2006

Wal-Mart: The Storm Flags Go Up In China

The Wall Street Journal reports that Wall-Mart will spend $1 billion to buy a chain of stores that would give it control of the largest department store and good retail network in China.

China is already one of Wall-Mart's largest markets. The purchase of the large chain, Trust-Mart, will substantially increase its footprint in a country where it must show contunued growth as its sales slow in the US. Wall-Mart will start with a majority interest in Trust-Mart and will increase that interest over time. The deal still has to be approved by Chinese authorities.
The question is whether Wall-Mart is making a deal with the devil to keep its market share in China growing. Clearly having a major presence in the world's most populated market is almost unavoidable for a company Wall-Mart's size which has few opportunities to continue the growth it had in the 1970s, 1980s, and 1990s.

And, Wal-Mart shareholders need a ray of hope. The stock traded at over $63 in early 2002. It now sits at $48.

But, the government-controlled unions in China have begun to move in on Wal-Mart. And, it is not clear that the unions are benign. The Chinese government has the way of making sure it has a finger in operations of foreign companies that are operating in the country. With the growth in Wal-Mart's presence, the company is likely to get further entwined in local politics.

And, that is not necessarily a good thing.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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