FEATURE: Barriers fall to foreign advance in wholesale trade

Asian Economic News, August 20, 2001

SHANGHAI, Aug. 17 Kyodo

China's first foreign-funded joint venture in the previously state-owned wholesale business will soon be set up here, as a foreign-generated revolution in the retail sector continues apace.

The $10 million Shanghai Baihong Trade Co. is expected to start operation within weeks. Japan's Marubeni Corp. will hold 49%, while the remaining shares will belong to Shanghai First Department Store (Group) Co., China's second largest retailing giant.

Industry watchers hail the move as further proof foreign players are infusing Chinese businesses with advanced management styles to revive sluggish domestic wholesale profits.

The joint venture also will serve as a role model for more foreign investors to make inroads into the domestic commercial market after China enters the World Trade Organization (WTO), they say.

''We believe the deal signals China's posture in the face of its WTO entry,'' said Yu Hong, an executive at Marubeni's Beijing office.

Since 1992, China has allowed foreign investors to enter the country's retailing sector. Nearly 300 foreign-invested retailing enterprises, including Wal-Mart, Carrefour and Metro, now operate, involving a total investment of $2 billion.

But not until 1999 did the state finally approve a controlled pilot plan to allow foreign investment in wholesale businesses.

''Foreign players couldn't have easy access to the sector because wholesaling played a vital role in the country's commercial circulation sector under the former planned economy mechanism,'' said Zhu Lianqing, researcher of the Shanghai Academy of Social Sciences.

Under the old centrally planned economy, state wholesale establishments were among the few channels for retailing companies to purchase goods. Change was long overdue as the traditional wholesale businesses were losing money hand-over-fist to foreign retailers.

''(The deal) is a market-driven move because the traditional wholesale sector won't survive unless we borrow from the advanced management and operation experience of foreign companies,'' said Li Shuxiang, an official with the Shanghai Chamber of Commerce.

In addition to having limited rights to import and export goods, the joint venture will buy daily-use articles manufactured by domestic companies and sell them wholesale to various retailers.

Analysts believe the pioneering joint venture will benefit the commercial sector of Shanghai, as it strives to become an international trade center during the 10th Five-Year Plan (2001-2005).

Last year, the government relaxed rules to permit establishment of Sino-foreign joint venture wholesalers in the pharmaceutical sector, and begin trials in the retail sector soon.

The motive for the change became clear from the stipulations for foreign applicants, requiring them to have ''advanced management experience and marketing technology, a broad global sales network, a good reputation, as well as an excellent performance record, and they must be capable of boosting JV exports''.

Foreign investors applying for wholesale joint ventures needed to have annual sales of $2.5 billion for at least three years, and assets up to $300 million one year prior to the application.

Realizing it has to lower the barriers to foreign products and companies after WTO membership, the government is keen to see as many domestic sectors as possible boost their competitiveness to survive the expected cutthroat competition. Allowing in a carefully vetted selection of foreigners now will help the cause.

On the retail side, Shanghai is striving to set up several large-scale retail chain stores with more than 2,000 outlets each during the same period, according to Vice Mayor Feng Guoqin.

''We will spend the next five years focusing on the improvement of cooperation between local enterprises and multinational retailers,'' he said.

Feng is optimistic about the ability of chain stores to increase retail profits in the city. He predicts that by 2005 the city's retail sales will reach 250 billion yuan ($30 billion) with an annual growth of 8%.

According to economic forecasts, Shanghai's retail sales volume should hit 185.4 billion yuan this year, an 8% rise over last year.

For the first time, the city has listed commerce as one of its five-year-plan pillar industries, backed by the construction of a new deep-water port and an international shipping port.

Shanghai is fast becoming the center for international purchasing operations for multinational retail giants.

Carrefour and Metro purchase more than 1.5 billion yuan worth of Chinese goods annually now, and the former, the world's second largest retailer, plans to increase its local purchases to 2.5 billion yuan next year.

The company has set up a special purchasing center in the city to supply Chinese goods to its global chain stores. German-based Metro set up its own purchasing network centered in Shanghai before it opened its first Chinese supermarket in the city four years ago.

Meanwhile, the central government is moving towards allowing allow foreign investors to hold a controlling stake of up to 65% in some joint venture retailers.