Walmart gets taste of the Lotte treatment in China

A shopping cart full of products is seen as a customer shops at a Wal-Mart store in Beijing
A shopping cart full of products is seen as a customer shops at a Wal-Mart store in Beijing, February 18, 2014. REUTERS/Kim Kyung-Hoon

HONG KONG, Jan 7 (Reuters Breakingviews) - Walmart’s (WMT.N) long run in China is in danger of coming to a slow, painful end. A broader diplomatic fracas over Beijing’s controversial policy toward Muslim minorities in the Xinjiang region may be translating into a steady stream of minor but draining regulatory scraps for the $400 billion retailer.

Chinese cybersecurity officials accused Walmart of network security negligence, according to a state media report on Wednesday, which also emphasised how the company has been repeatedly fined for various infractions. It looks to be part of a widening local campaign after netizens said Walmart removed Xinjiang-sourced products from the virtual shelves of its local Sam’s Club app. Walmart has not officially commented on the allegations.

It’s a tricky situation. Just before Christmas, U.S. President Joe Biden signed legislation banning imports from Xinjiang that cannot be proven to have been made without forced labour. That doesn’t stop Walmart China from buying and selling such products inside China, however. Indeed, Beijing’s anti-sanctions law passed last summer could require companies to refuse to comply with such measures, and also to assist with retaliation, while exposing them to lawsuits from affected Chinese companies. If Walmart overstepped, cybersecurity fines could be the least of its troubles.

Beijing has shown itself willing to punish private companies for the sins of their governments. When Seoul placed an American missile-defence system on South Korean land owned by Lotte Group in 2016, Chinese authorities mercilessly flogged its domestic operations. They closed stores for fire safety violations and fomented boycotts. Lotte Shopping (023530.KS) was effectively forced to sell its stores to local buyers and exit in 2018.

A similar outcome wouldn’t exactly crush Walmart. Its more than 400 stores across the country only accounted for around $11 billion of the $560 billion in revenue generated in the fiscal year through Jan. 31. There also might be limits to Beijing’s persecution: Chinese officials will be aware that Walmart supports plenty of local jobs, as an employer and as a big factory customer.

Even so, a steady diet of harassment by petty regulators can be exhausting. If it persists, and the political headaches grow, it isn’t hard to imagine Walmart rethinking its China strategy.

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- China Quality News, a publication supported by the State Administration for Market Regulation, reported on Jan. 5 that cybersecurity investigators in Shenzhen found Walmart’s China operation had failed to address 19 network security problems in a timely manner. “From 2017 to 2020, Walmart has violated the law multiple times related to food, health food, advertising, infringing on consumer rights etcetera, the market supervision bureau has fined it according to the relevant regulations,” according to the publication.

Editing by Jeffrey Goldfarb and Katrina Hamlin

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Asia Economics Editor Pete Sweeney joined Reuters Breakingviews in Hong Kong in September 2016. Previously he served as Reuters' chief correspondent for China Economy and Markets, running teams in Shanghai and Beijing; before that he was editor of China Economic Review, a monthly magazine focused on providing news and analysis on the mainland economy. Sweeney came to China as a Fulbright scholar in 2008, and in that role conducted research on the Chinese aviation industry and outbound M&A. In prior incarnations he helped resettle refugees in Atlanta, covered the European Union out of Brussels, and took a poorly timed swing at craft-beer entrepreneurship in Quito even as the Ecuadorean currency collapsed (not his fault). He speaks Mandarin Chinese, at the expense of his Spanish.