Supplier Responses to Wal-Mart™s Invasion of Mexicospot.colorado.edu/~kellerw/WalmexS.pdfWal-Mart...
Transcript of Supplier Responses to Wal-Mart™s Invasion of Mexicospot.colorado.edu/~kellerw/WalmexS.pdfWal-Mart...
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Supplier Responses to Wal-Marts Invasion of Mexico
Leonardo Iacovone (The World Bank)Beata Javorcik (University of Oxford and CEPR)
Wolfgang Keller (University of Colorado, NBER, and CEPR)James Tybout (Penn State University and NBER)
June 2009
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Equilibrium price setting when products di¤er in quality
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Mexico: a globalization shock
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Wal-Mart o¤ers its retailing services to Mexican rms
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Wal-Marts Invasion of Mexico: the argument
Wal-Mart enters after NAFTA and Mexicos joining the GATT in 1985
Wal-Mart brings its business practices to Mexico
The FDI triggers massive reshu ing among Mexican producersI Wal-Mart increases their market size (national distribution)
F Heterogeneous rms: strong rms gain, weak rms lose
Wal-Marts FDI gives incentives to innovate and upgradeI Upgrading required to ensure compatibility w/ Wal-Mart
F Heterogeneous rms: strong rms upgrade, weak rms do not
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Overview
1 Firm interviews in Mexico as input for modeling the impact ofWal-Mart on Mexican suppliers (summarized in Javorcik, Keller, andTybout 2008)
2 Simulation of sales, upgrading, pricing and other rm responses
3 Regression evidence on the same variables using Mexican micro data
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The Invasion
Wal-Mart entered Mexico viajoint venture with BodegasAurrera in 1992
I Bought controlling interestin 1997 and becameWal-Mart de México(Walmex)
Walmex is Mexicos largestprivate employer since 2003
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Walmex store formats
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Regional Distribution Centers
Walmex stores are supplied by regional distribution centers (CEDIS),as well as direct deliveries from producers
30 percent of perishable goods are bought locally directly fromsuppliers
Supplying a single CEDIS gives a producer access to the entirenetwork
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Walmexgeographic expansion patterns: summary
Walmex started out in the most populated areapartly becauseAurrera was already there
Walmex expanded by adding stores throughout Mexico, rather thangradually radiating out from the center
I In contrast to Wal-Marts strategy in the United States (Holmes 2007)
Distribution centers followed stores, so suppliersproximity to storesmeans they have good access to Walmex
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Becoming a Walmex supplier: the pros
Substantial increase in market size
Beneting from Walmex innovative business methods
I Modernized IT-based system of channeling deliveries from suppliersthrough centralized warehouses
I Walmex requires on-time deliveries (ned if not) and drivers must carryidentication cards
I Shipments must be on standardized corner-protected palettes (rentablefrom Walmex), subject to third-party quality audits
Getting ready for Wal-Mart
I is like "getting into a company version of basic training with animplacable Army drill sergeant"
I "helps everything: customer focus, inventory management, speed tomarket" (Fishman 2003)
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Becoming a Walmex supplier: the pros
Substantial increase in market size
Beneting from Walmex innovative business methods
I Modernized IT-based system of channeling deliveries from suppliersthrough centralized warehouses
I Walmex requires on-time deliveries (ned if not) and drivers must carryidentication cards
I Shipments must be on standardized corner-protected palettes (rentablefrom Walmex), subject to third-party quality audits
Getting ready for Wal-Mart
I is like "getting into a company version of basic training with animplacable Army drill sergeant"
I "helps everything: customer focus, inventory management, speed tomarket" (Fishman 2003)
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Becoming a Walmex supplier: the pros
Substantial increase in market size
Beneting from Walmex innovative business methodsI Modernized IT-based system of channeling deliveries from suppliersthrough centralized warehouses
I Walmex requires on-time deliveries (ned if not) and drivers must carryidentication cards
I Shipments must be on standardized corner-protected palettes (rentablefrom Walmex), subject to third-party quality audits
Getting ready for Wal-Mart
I is like "getting into a company version of basic training with animplacable Army drill sergeant"
I "helps everything: customer focus, inventory management, speed tomarket" (Fishman 2003)
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Becoming a Walmex supplier: the pros
Substantial increase in market size
Beneting from Walmex innovative business methodsI Modernized IT-based system of channeling deliveries from suppliersthrough centralized warehouses
I Walmex requires on-time deliveries (ned if not) and drivers must carryidentication cards
I Shipments must be on standardized corner-protected palettes (rentablefrom Walmex), subject to third-party quality audits
Getting ready for Wal-Mart
I is like "getting into a company version of basic training with animplacable Army drill sergeant"
I "helps everything: customer focus, inventory management, speed tomarket" (Fishman 2003)
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Becoming a Walmex supplier: the pros
Substantial increase in market size
Beneting from Walmex innovative business methodsI Modernized IT-based system of channeling deliveries from suppliersthrough centralized warehouses
I Walmex requires on-time deliveries (ned if not) and drivers must carryidentication cards
I Shipments must be on standardized corner-protected palettes (rentablefrom Walmex), subject to third-party quality audits
Getting ready for Wal-Mart
I is like "getting into a company version of basic training with animplacable Army drill sergeant"
I "helps everything: customer focus, inventory management, speed tomarket" (Fishman 2003)
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Becoming a Walmex supplier: the pros
Substantial increase in market size
Beneting from Walmex innovative business methodsI Modernized IT-based system of channeling deliveries from suppliersthrough centralized warehouses
I Walmex requires on-time deliveries (ned if not) and drivers must carryidentication cards
I Shipments must be on standardized corner-protected palettes (rentablefrom Walmex), subject to third-party quality audits
Getting ready for Wal-Mart
I is like "getting into a company version of basic training with animplacable Army drill sergeant"
I "helps everything: customer focus, inventory management, speed tomarket" (Fishman 2003)
() Wal-Marts Invasion of Mexico June 2009 11 / 42
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Becoming a Walmex supplier: the pros
Substantial increase in market size
Beneting from Walmex innovative business methodsI Modernized IT-based system of channeling deliveries from suppliersthrough centralized warehouses
I Walmex requires on-time deliveries (ned if not) and drivers must carryidentication cards
I Shipments must be on standardized corner-protected palettes (rentablefrom Walmex), subject to third-party quality audits
Getting ready for Wal-MartI is like "getting into a company version of basic training with animplacable Army drill sergeant"
I "helps everything: customer focus, inventory management, speed tomarket" (Fishman 2003)
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Becoming a Walmex supplier: the pros
Substantial increase in market size
Beneting from Walmex innovative business methodsI Modernized IT-based system of channeling deliveries from suppliersthrough centralized warehouses
I Walmex requires on-time deliveries (ned if not) and drivers must carryidentication cards
I Shipments must be on standardized corner-protected palettes (rentablefrom Walmex), subject to third-party quality audits
Getting ready for Wal-MartI is like "getting into a company version of basic training with animplacable Army drill sergeant"
I "helps everything: customer focus, inventory management, speed tomarket" (Fishman 2003)
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Becoming a Walmex supplier: the cons
Walmex keeps negotiations with its suppliers as stark aspossible both the bargaining environment and the number ofnegotiable contract features (price, quality, quantity)
I Often makes a take-it-or-leave-it o¤erI Expects product innovation or annual price concessionsI Uses store brands to create competition
For a supplier to complain about Wal-Marts approach
I "would be committing suicide. If Wal-Mart takes something the wrongway, its like Saddam Hussein. You just dont want to p___ them o¤"(Paul Kelly, business consultant; Javorcik, Keller, and Tybout 2008)
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Becoming a Walmex supplier: the cons
Walmex keeps negotiations with its suppliers as stark aspossible both the bargaining environment and the number ofnegotiable contract features (price, quality, quantity)
I Often makes a take-it-or-leave-it o¤er
I Expects product innovation or annual price concessionsI Uses store brands to create competition
For a supplier to complain about Wal-Marts approach
I "would be committing suicide. If Wal-Mart takes something the wrongway, its like Saddam Hussein. You just dont want to p___ them o¤"(Paul Kelly, business consultant; Javorcik, Keller, and Tybout 2008)
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Becoming a Walmex supplier: the cons
Walmex keeps negotiations with its suppliers as stark aspossible both the bargaining environment and the number ofnegotiable contract features (price, quality, quantity)
I Often makes a take-it-or-leave-it o¤erI Expects product innovation or annual price concessions
I Uses store brands to create competition
For a supplier to complain about Wal-Marts approach
I "would be committing suicide. If Wal-Mart takes something the wrongway, its like Saddam Hussein. You just dont want to p___ them o¤"(Paul Kelly, business consultant; Javorcik, Keller, and Tybout 2008)
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Becoming a Walmex supplier: the cons
Walmex keeps negotiations with its suppliers as stark aspossible both the bargaining environment and the number ofnegotiable contract features (price, quality, quantity)
I Often makes a take-it-or-leave-it o¤erI Expects product innovation or annual price concessionsI Uses store brands to create competition
For a supplier to complain about Wal-Marts approach
I "would be committing suicide. If Wal-Mart takes something the wrongway, its like Saddam Hussein. You just dont want to p___ them o¤"(Paul Kelly, business consultant; Javorcik, Keller, and Tybout 2008)
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Becoming a Walmex supplier: the cons
Walmex keeps negotiations with its suppliers as stark aspossible both the bargaining environment and the number ofnegotiable contract features (price, quality, quantity)
I Often makes a take-it-or-leave-it o¤erI Expects product innovation or annual price concessionsI Uses store brands to create competition
For a supplier to complain about Wal-Marts approach
I "would be committing suicide. If Wal-Mart takes something the wrongway, its like Saddam Hussein. You just dont want to p___ them o¤"(Paul Kelly, business consultant; Javorcik, Keller, and Tybout 2008)
() Wal-Marts Invasion of Mexico June 2009 12 / 42
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Becoming a Walmex supplier: the cons
Walmex keeps negotiations with its suppliers as stark aspossible both the bargaining environment and the number ofnegotiable contract features (price, quality, quantity)
I Often makes a take-it-or-leave-it o¤erI Expects product innovation or annual price concessionsI Uses store brands to create competition
For a supplier to complain about Wal-Marts approachI "would be committing suicide. If Wal-Mart takes something the wrongway, its like Saddam Hussein. You just dont want to p___ them o¤"(Paul Kelly, business consultant; Javorcik, Keller, and Tybout 2008)
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A simple model of Walmexupstream industry
Indirect utility from a unit of product j for consumer i :
Uij = θ1 ln(ξ j ) + βwwj + θ2 ln (Y Pj ) + εijdef= U ij + εij .
ξ j : Quality of good supplied by rm jPj : Price of good jY : Income of representative consumerwj : = 1 if j retails through Walmex, 0 otherwiseεij : Type 1 extreme value, iid across consumers and goods
If rm j sells through Walmex, it makes its product more accessible toconsumers, so more consumers choose it
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Static and dynamic rm heterogeneity
Firmsproducts di¤er in terms of their current quality, ξ j
At the beginning each period, each type of rm decides whether toexit for scrap value or continue operating
Potential entrants decide whether to create new rms
Those that continue choose a level of investment in innovationI Investment increases the probability of quality improvement
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The choice of retailing
Each incumbent rm decides whether to sell through Walmex(wj = 1 or wj = 0)
I The benet: Access to Walmex consumer baseI The cost: Walmex dictates a low price
Pure Bertrand product market competition for rms not sellingthrough Walmex
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Nash Equilibrium
In equilibriumI The transition density for the industry states is correctly understood byall agents
I Spot markets clear at optimal price (Pj ) and retail (wj ) choicesI Optimal investments towards quality improvements are made
Given parameters, we solve for the oblivious equilibrium numericallyI Oblivious equilibrium: approximation technique introduced byWeintraub, Benkard and Roy (2007)
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Optimal price setting
Firms selling through Walmex must meet a minimum quality leveland price at:
P j = P0 + θ3 ln(ξ j ), θ3 > 0
The remaining rms do best to price at:
Pj =Y + θ2Cj (1 hj )1+ θ2(1 hj )
, j 2 I
where
hj = h(j jw,P, ξ) =exp
U ij
∑` expU i`+ 1
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Equilibrium retailing choice
Firms anticipate second stage equilibrium prices for each quality level
Given the decisions of their competitors (wj ), they make theprot-maximizing Walmex choice by comparing
πj = π(j ,wj = 0jwj , ξ) = (Pj C ) hj M
and
πj = π(j ,wj = 1jwj , ξ) =P j C
hj M
Equilibria in retailing choices obtain when:
[πj (j ,wj = 1jwj , ξ) πj (j ,wj = 0jwj , ξ)] wj+[πj (j ,wj = 0jwj , ξ) πj (j ,wj = 1jwj , ξ)] (1 wj ) 0 8 j .
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Product quality investments
rj is the current level of R&D of the j th producer in order to inuenceits product quality next period, hereafter denoted ξ 0j
Product quality realizations are elements of a discrete ordered set
Quality moves at most one position for each rm per period
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The evolution of product quality over time
With R&D e¤ort r , a rms probability of success is ar1+ar
Firms lose a quality step with exogenous probability δ
The quality transition probabilities are
Up : Prhξ 0j = ξ i+1jξ j = ξ i
i=
arj1+arj
(1 δ)
Constant : Prhξ 0j = ξ i jξ j = ξ i
i=1 arj
1+arj
(1 δ) +
arj1+arj
δ
Down : Prhξ 0j = ξ i1jξ j = ξ i
i=1 arj
1+arj
δ
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Bellman equation
Let the i th element of s = (s1, s2, ..., sK ) be the number of rms inthe industry at quality level ξ i
Let sj be the same vector, except in that it leaves rm j out of thecount
Let πξ j ,, sj
be the prots of rm j when it is at quality ξ j , and
the remainder of the industry is at sjThen optimal decisions are characterized by:
Vξ j ,, sj
= max
φs ,maxrj
πξ j ,, sj
cr r + βEΩj
V .ξ 0j ,, s
0j
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Entry and exit
Firms enter at some common initial quality level when the expectedprots exceeds the (exogenous) cost of creating a new rm
Firms exit when the scrap value φs exceeds its continuation value
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Simulations: main parameters
WithoutWalmex
WithWalmex option
C : Marginal costs 1.5 1.5
βw : Walmex boost 1.0 1.0
ξ : Min. Walmex quality n.a. 2.0
θ3 : Quality-price reln n.a. 0.4
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Price setting in the Walmex world
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R&D investment
Blue line: No Walmex Green line: Walmex is present
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Product quality upgrading
Blue line: No Walmex Green line: Walmex is present
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The number of rms
Blue line: No Walmex Green line: Walmex is present
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Key model implication
Both static and dynamic responses to Walmex vary across the qualitydistribution:
Low Medium High
Sales++ + *
Innovation &Upgrading
++ + *
Price +
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Simulations: specic results
1 Net exit occurs (39 rms ! 20 rms)
2 Operating prots increase by 23%
3 Exit and entry rates fall (3.5% ! 1.8%)
4 Consumer surplus rises by 2%
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Regression evidence: key data
Panel data on Mexican manufacturing establishments (1993 to 2002)I Almost 7,000 establishments (= plants) across 205 industry groupsI Source: INEGI
Number of Walmex stores, by state and over time
Information on whether products are carried by Walmex, or not
Control variables: State GDPs, US and Mexican tari¤ levels, and xede¤ects
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Estimation
Identication: Are establishments that sell a Walmex-type producta¤ected di¤erently when Walmexregional presence increases,compared to establishments that do not sell Walmex-type products?
Use simultaneous quintile regressions:Yit Y jt
= βq1 ln(Nst ) + βq2WMXj + βq3 ln(Nst )WMXj
+βq4 ln(GDPst ) + βq5 ln(GDPst )WMXj+βq6TAR
MEXjt + βq7TAR
USjt + αqt + εqit ,
where i 2 state s, industry j ; e.g., in the rst results, dependentvariable Yit is domestic sales of establishment i in year t
q is the quintile of the sales distribution (generally, the Yit variabledistn)
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Summary statistics
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Walmex and changes in sales for small versus large rms
20th percentile 80th percentile
ln(#WalMartStores)0.159
(0.014)0.089
(0.015)
WalMartProduct5.264(0.871)
1.122(0.968)
ln (#WalMartStores)WalMartProduct
0.214(0.038)
0.072
(0.042)
ln(StateGDP)0.247(0.020)
0.100(0.023)
ln(StateGDP)WalMartProduct
0.316
(0.053)0.059(0.059)
Number of obs: 52,861; regression also includes constant, tari¤ levels, and time xed e¤ects; bootstrapped standard errors in
parentheses
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Changes in sales across quintiles
Coefficient on ln(#WalmexStores) xWalMartProduct
0.3
0.2
0.1
0
0.1
0.2
q20 q40 q60 q80
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Changes in R&D spending across rms
0.06
0.05
0.04
0.03
0.02
0.01
0
q20 q40 q60 q80
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Skill composition as another indicator of upgrading
0.02
0.01
0
0.01
0.02
0.03
q20 q40 q60 q80
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Importing intermediate inputs from abroad
43210123
q20 q40 q60 q80
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Walmex and labor productivity changes
0.1
0.05
0
0.05
0.1
0.15
0.2
q20 q40 q60 q80
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The change in prices charged across rms
0
0.01
0.02
0.03
0.04
0.05
q20 q40 q60 q80
Establishment-level prices incorporate product-level information; index = 100 in 1994, no time xed e¤ects
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Supplier response: Model versus data
Sales
Lowquality
Mediumquality
Highquality
++ + *
Upgrading
Lowquality
Mediumquality
Highquality
++ + *
Price
Lowquality
Mediumquality
Highquality
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Summary
Wal-Marts entry had a major impact on Mexicos manufacturingindustry
We nd static reallocation (between-rm) and dynamic (within-rm)e¤ects
The industry evolution model matches the interview and quantitativeevidence well
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Implications
Empirical analysis ought to bring possible heterogeneous responsesmore into focus
I Market share gains versus lossesI More technology spending versus lessI Firm- and labor force upgrading versus downgrading
Upstream-downstream relations appear to be important for assessingthe impact of trade and FDI liberalization on market size,technological change, and welfare
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