Wal-Mart and the Yuan Debate
Case Study: Wal-Mart and the yuan debate
Why is the value of the yuan so important?
Wal-Mart’s business strategy relies on low production costs which it can pass on to its customers. If Wal-Mart were a country then it would be China’s eighth largest trading partner ahead of Russia, Australia, and Canada. Wal-Mart’s non-Chinese owned suppliers operating in China number nearly 5,000 and all of them benefit from a low valued yuan compared to the dollar. The 176 million worldwide customers of Wal-Mart also benefit from the low valued yuan. With nearly 70% of Wal-Mart’s products coming from China a sharp increase in the value of the yuan against the dollar can be devastating for the company as the increased costs for …show more content…
The United States has enjoyed being its currency being the world standard for many decades, but as other countries like China gain on the US economically there is a movement to change the US dollar’s status. Just a few months ago China and Japan announced that the two countries will begin trading currencies directly instead of using the US dollar as an intermediary (NARIOKA, 2012).
Wal-Mart can prepare by hedging against currency fluctuations. If it hedges in anticipation of a yuan appreciation it can avoid the higher costs it would incur from its suppliers. Also forward contracts could be another strategy. Wal-Mart could agree to make a future purchase at current currency rates. These strategies are relatively short term solutions.
In the long term Wal-Mart will have to do several things. First it will have to find other ways to reduce costs. This may mean finding other nations that may have a comparative advantage in the production of goods compared to China. It could also promote a “buy American” marketing campaign if it is forced to return some of its goods production back to the US do to politics or the economics of the time. It can also pursue new markets. It currently operates 3,600 stores in 15 other countries (Peng, 2011). Finally in the long run the company structure and strategy may have to be revisited.