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Wal-Mart executives resign in China labeling scandal

October 17, 2011 |  3:22 am

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Wal-Mart said Monday it was replacing the head of its operations in China, the giant U.S. retailer's latest setback in the country after employees were arrested and detained last week in the western city of Chongqing in connection with a labeling scandal.

The company said in a statement posted on its website that Ed Chan, its chief executive in China since 2007, was leaving the company for personal reasons. Clara Wong, a senior executive for human resources, was also stepping down, the statement said.

Though Wal-Mart did not link the personnel moves to the controversy in Chongqing, the company continues to deal with fallout from charges that it sold about 140,000 pounds of pork over the last two years that was mislabeled as a more expensive organic variety. The added cost to consumers amounted to about $115,000, according to the city government's website.

News of the violations surfaced last week after local authorities ordered the temporary closure of 13 Wal-Mart locations in the city, arrested two employees and detained another 35. The company was also fined $575,000.

The punishment, which some foreign observers considered excessive, was met with acquiescence from Wal-Mart as it apologized for the problems and pledged to correct them.

"We are cooperating with the authorities and are looking forward to exceeding our customers' expectations when we reopen our stores in Chongqing,” Anthony Rose, Wal-Mart's vice president of corporate affairs in Asia, said in an email to The Times on Monday.

This is not the first time Wal-Mart has run afoul of the law in China. The retail chain has been fined by regulators on several occasions, including incidents involving the sale of expired duck in Chongqing and changes in the expiration dates on frozen food in Changsha, the capital of central Hunan province.

In February, Wal-Mart and French chain Carrefour were fined a total of $1.4 million after they were found to be deceiving customers about discounts and mislabeling prices.

Foreign firms with big stakes in China have little room to mount any defense against government charges, as they risk losing hard-won positions in one of the world's most important emerging consumer markets, experts say.

"Given the absence of any effective recourse to challenge the government's actions, Wal-Mart has no choice but to engage in a strategy of appeasement," said James Zimmerman, a partner at the Beijing office of Sheppard Mullin Richter & Hampton and a former chairman of the American Chamber of Commerce in China.

"Fines and apologies are obviously not enough," Zimmerman said. "Someone needs to fall on the sword before the government declares a victory and releases their employees and allows the reopening of their stores. That's unfortunate, but that's China."

Experts say the government’s reaction was likely heightened by the way food safety and pork prices have become hot-button issues in China. The country has been ravaged by food scandals involving tainted milk and recycled cooking oil. Meanwhile, the price of pork has shot up over 60% this year because of inflation and supply shortages.

The Associated Press reported last week that some see a political connection between the case and Chongqing's ambitious Communist Party chief, Bo Xilai. The charismatic apparatchik famously rooted out the city's entrenched criminal gangs and could benefit by again looking strong by cracking the whip on a major foreign firm. Bo is believed to be vying for a top position in the central government when it begins retiring leaders next year.

"It's probably a mixture of political positioning ahead of the leadership transition, with people there [in Chongqing] wanting to be seen as consumer advocates, and also an effort to balance some of the bad press Chinese companies have gotten, to show that they're not the only ones with problems," Torsten Stocker, a Hong Kong-based consumer goods specialist at U.S. consulting firm Monitor Group, told the Associated Press.

Wal-Mart said it expects its stores in Chongqing to reopen on Oct. 24, the first day their ordered closures can expire.

The company has expanded aggressively across China since it entered the country in 1996, but has been met with stiff competition from local and European rivals. The company reported $7.5 billion in revenue in China last year, equal to less than 2% of its global revenues.

The Bentonville, Ark.-based company has hit bumps along the way, including unsuccessfully resisting the inclusion of its employees into China's official workers union and the resignations of its chief financial officer and chief operating officer earlier this year amid attempts to purchase a larger stake in Taiwanese supermarket operator Trust-Mart.

Unlike in the U.S. where Wal-Mart is seen as a retailer for blue-collar consumers, the chain is regarded as slightly more high-end in China, compared with local grocers and supermarkets.

With 346 locations as of August, China is Wal-Mart's fourth-largest foreign market -– and is seen as a key to the company's growth given the potential for a prolonged slump in the U.S. economy.

"International remains the key growth driver for our company," Mike Duke, Wal-Mart's chief executive, said earlier this year.

RELATED:

Inflation remains a worry in China

In China, what you eat tells who you are

Pork shortage hurting Chinese economy

-- David Pierson
Twitter.com/dhpierson

Photo: Customers outside a Wal-Mart store in Loudi, Hunan province. Credit: Eugene Hoshiko / Associated Press

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