PriceSmart’s dumb moves
Tan Wei

On October 23, nine of the former senior management staff of PriceSmart Membership Shopping were summoned for interrogation at the First Intermediate People’s Court of Beijing.
The case, understandably, attracted attention from a large number of people. Zhao Kun, an alias due to his request for anonymity, from northeast China’s Harbin City, was among them. Zhao was one of the suppliers of PriceSmart, which had defaulted on a payment of goods for over 300,000 yuan. But this trial didn’t bring him any good news.
The court held a three-day trial involving alleged contract fraud and illegal capital withdrawal at PriceSmart, and looked into the criminal responsibility of its nine senior managers. But the court didn’t make a ruling on how to handle the large amount of money the company owed to suppliers.
Zhao’s woe is just the tip of the iceberg of PriceSmart’s failure to pay for goods. PriceSmart was in default on payments to suppliers of nearly 2 billion yuan, excluding its loans from banks-it owed more than 1 billion yuan to banks.
Meanwhile, the absent company founder, controller and chief suspect in the PriceSmart case, Liu Wuyi, had left the country, leaving behind a fragmented and heavily indebted PriceSmart.
The company’s case study serves as a lesson for the business community and government alike. Essentially, the moral of the story isn’t good, and neither is ill-considered growth.
Becoming notorious
In 1995, Liu registered a company called PriceSmart Membership Superstore Enterprise Group (PM Group), which claimed to be derived from the trademark “PriceSmart” under U.S. Price Enterprises Inc.
It is notable that although the PriceSmart set up by Liu was the first membership-only supermarket in China and based on the U.S. model, the Chinese PM Group is actually a private company without any foreign capital. It adopted a kind of franchise store operation. Whenever a new PriceSmart supermarket opened in China, it would pay a sum of money to the U.S. side. Apart from the money, the PM Group China had no connections to the U.S. side.
In the next eight years, Liu expanded PriceSmart by starting membership stores nationwide, and in 2001, he also developed N-Mart to attract non-membership customers. By the end of 2004, he had opened altogether 48 stores in China and the nationwide sales once hit 4 billion yuan a year in its heyday. Liu was doing a good job targeting the wealthy demographic.
“Cars parked outside of PriceSmart were all imported, and those who drove homemade cars to a PriceSmart would be mocked at,” said Cheng Keneng, once a member himself.
“In the beginning, PriceSmart followed the rules and regulations docilely and was welcomed in local areas,” said Zhao. “When Liu Wuyi found it so easy to tap money by opening more stores, he became crazy about opening new stores and once ordered to open 70 more in three years. However, due to the lack of capital, talent and proper management, PriceSmart’s expansion was totally out of control.”
In 2004, banks tightened credit for PriceSmart, which put pressure on the company’s capital chain. In July 2004, the Changsha PriceSmart was accused by Nanfang Construction Material of owing its company a total of 28.09 million yuan in rent, water and electricity fees. As a result of the lawsuit, the Changsha PriceSmart was forced to close, creating a domino effect. Local banks and suppliers all urged PriceSmart to pay off its debts. Eventually, because of capital chain problems, all PriceSmart stores were closed by March 2005.
Dangerous pattern
The formerly resplendent private retailing enterprise came to a dead end with about 2 billion yuan in debt.
One question many inquiring minds want to know since the company’s downfall is this: What were the company’s fundamental problems?
“The root of the PriceSmart crisis is in its dangerous business pattern,” said Yang Qian, a professor of management at Beijing Commercial Management Cadre College. Yang stated that PriceSmart manipulated money from banks and suppliers in order to get more market share while its own capital was very limited. Once one link was in trouble, all the dominoes fell.
Yang said that the daily revenue of a 20,000-square-meter PriceSmart or N-Mart store was about 1 million yuan, and Liu could get 60 million in two months. But PriceSmart used to settle accounts with its suppliers only once in a period of more than three months. Then Liu could take the 60 million yuan in accounts payable and open a new store. In this manner, more and more stores were opened. Understandably, the capital chain built on suppliers’ money and bank loans was extremely fragile.
Beginning in 2002, PriceSmart was frequently accused of delaying payment. In the middle of 2004, suppliers united to boycott PriceSmart, causing a complete break in its chain.
“From then on, the capital black hole had been revealed,” Yang said.
As a matter of fact, it was not just PriceSmart that was running this dangerous operating pattern. Many retailers are still expanding their business in this way. Chen Ji, a professor at Beijing Technology and Business University, pointed out that U.S. supermarkets attach great importance to credibility and stick to the terms of contracts. There, it is much less possible to delay suppliers’ payments.
However, a considerable number of domestic retailers still dream of maintaining business operations and expanding via bank loans and suppliers’ money. Once the banks and suppliers withdraw their money, the retailers are hit hard and even collapse. They eventually get themselves in trouble.
The blind worship of foreign brands was another factor in the dangerous operation of PriceSmart.
“Many local areas worship imported brands blindly and the governments are keen on attracting investment to boost GDP,” said Zhang Yulin, assistant researcher of the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce. Zhang noted that local governments shouldn’t spoil retailers in the name of achieving good performance, increasing employment and taxation.
“The insufficient information disclosure and irresponsible investigation and approval system naturally give rise to over-competition, leading to a disordered market,” Zhang said. He noted that PriceSmart’s shops took bank loans by guaranteeing one another, which is the least reliable practice and is dangerous.
It was later proved that this kind of guarantee actually offered a convenient way to manipulate capital, leading to a large amount of bad debt in banks. To some degree, banks were also responsible as they didn’t have a comprehensive approval and investigation system for debtors. The banks’ carelessness essentially helped spoil PriceSmart.
Alarm bells for all
Zhao said from his perspective, the government and business world now should be more aware of the importance of strengthening legislation in the market and preventing retailers from illegally tapping money through unbridled expansion.
“If the legislation and supervision is not strong enough, such cases like PriceSmart will still occur,” Zhao said.
Zhao’s prayer is now being answered.
On November 15, the Administrative Measures for Fair Transaction Between Retailers and Suppliers was jointly issued by the Ministry of Commerce, National Development and Reform Commission, Ministry of Public Security, and State Administration of Taxation. These measures state that the retailers should pay for goods in less than 60 days.
Huang Hai, assistant to the Minister of Commerce, said that some retailers in China adopt a similar operating pattern as PriceSmart, delaying payment to suppliers for three or four months with the excuse of opening new stores. In this way, the retailers can expand their business rapidly, but also, dangerously.
“In China, there is much more supply than demand, and also due to the lack of restrictive laws, many retailers are integrated to form retailer giants and abuse their market advantages, which gives rise to unfair and unjust transactions,” Huang said.
Retailers’ default on payment has frequently caused business crises.
“Private retailers generally lack capital; hence they have the inclination to stall payment to suppliers and bank loans to open more shops,” said Huang. He pointed out that this operating pattern was dangerous and could easily cause a break in the capital chain. It also offers a convenient way for retailers to run away with the money.
Meanwhile, the newly enacted government measures also have special regulations for foreign enterprises. First, foreign enterprises will be subject to business network investigation if intending to open a business in China.
“Although we remove geographic and quantitative restrictions on shops, we will still carry out an examination and approval system,” Huang said. “Foreign enterprises should act in line with the commercial network planning of local governments. If they don’t, they are not allowed to open.”
Furthermore, according to the Law of the People’s Republic of China on Foreign-funded Enterprises and Law of the People’s Republic of China on Chinese-Foreign Equity Joint Venture, “If the foreign-funded enterprises are going to open new stores and expand their operating scale, they must increase investment, without which they won’t be allowed to open new stores,” said Huang.
Zhao said the implementation of the new measures is without doubt good news. However, Zhao also worried that some retailers are simply too aggressive and leave a doubt as to whether the measures can be properly enforced.
Zhao said that before the implementation of the new measures, there were other similar regulations on retailers. However, the enforcement departments didn’t punish enough.
“We are unsatisfied with the exploitation of retailers, but because of competition, we suppliers must enter the big shopping centers,” Zhao said. “If we lose one big retailer, it means we are going to lose dozens of its networks. It also means we send the market share to our competitors.”

(The Daily Mail-Beijing Review  Articles Exchange Item)


Indian Army’s deepening stress lines
A. Siddique

Mental and physical robustness is the key word in the profession of arms. No army, however strong in terms of numerical strength and military hardware can prove equal to the task if its mental and psychological make over gets depleted for various possible reasons. Traditionally, the inbuilt ethos resists the institutional rot to set and the silent cries of the system, calling for corrective action, can be heard by experienced hands. Many tell-tale indicators are available to assess the degenerating state of a soldier’s mind or a body of troops - increasing number of soldiers on daily sick report, absenting from duty without leave, cases of insubordination, increasing frequency of violent fracas etc are few of the indicators for the experienced hands to look for. But the symptoms that truly set the alarm bells shreiking are cases of suicide and opening fire on colleagues and superiors - and if those time tested indications are true, then Indian Army seems to be in deep trouble.
It is no secret, even in India, that the counterinsurgencies across its length and breadth are stretching her Army to the breaking point. Her political steadfastness to crush and prevail may outwardly be intact but the resolve of her military instrument to rise to the challenge is depleting fast. Three fourth of 1.1 million strong Indian Army is employed in the Indian Held Kashmir and the fractious Indian North East and the grind and the omnipresence of protracted threat has stretched the nerves of the officers corps and the soldiers to breaking point - and in some cases beyond it. Only in the IHK, past four years have seen over five hundred cases of suicide among the rank and file of the Indian Army, with odd sprinkling of officers, who went over the edge of sanity. Then there are cases of nervous breakdown in which soldiers turn their guns on their comrades and officers with whom they have had years of camaraderie. The period saw at least hundred Indian soldiers running amok and turning their weapons on comrades and officers. The measure of seriousness of the situation can be gaged from the fact that five incidents of running amok have occurred in the past six months and the Indian Army has been constrained to take up this issue on the agenda of the Army Commanders Conference.
The month of October alone saw five stress induced cases of suicide and of soldierly fratricide. The tally opened on 1st Oct with the suicide of a 23 year old trainee at the Indian Military Academy when Cadet Davendar Kumar Sharma was found hanging from the ceiling fan in his room. The Academy officials maintained that it was an act prompted by depression but the deceased’s parents insisted that the young man was killed before being hanged by his colleagues. On 2nd Oct an Indian soldier belonging to 17 Rashtriya Rifles in Gund - Banihal area of Doda District shot himself with his service weapon. Official sources said that the soldier was visibly upset ever since he returned from home a few days ago. Third and fourth serial incidents of fratricide occurred on 21st and 22nd October when two soldiers killed five colleagues before shooting themselves. In the first incident Sepoy S K Rabha killed two havaldars and a sepoy and injured three others as they slept before turning the gun upon himself. Second incident occurred on 22nd October, at 0300 hours in the morning, when Naik H L Langam of 60 Rashtriya Rifles reached the end of his tether and killed two of his colleagues before shooting himself. The incident occurred as the party was engaged in road opening duties. It goes without saying that stress got under the skin of the fatigued naik who could bear it no more. The fifth incident, third in a row in one week, occurred when Sepoy John Thomas belonging to 1st Bihar regiment shot himself with his INSAS rifle at Patti Manga area in Poonch District. Manifest reason which triggered the incident was fatigue and battle field stress.
Counter insurgency operations are a nerve raking job and no Unit, however elite, can go on for ever. Troops need regular breaks for the purpose of rest and recreation to uncoil their taut psyche. Periodical homeward visits by soldiers to take care of personal problems is an aspect, which unless catered to, keeps nagging and ratchet up emotional instability capable of pushing an individual beyond the edge of sanity and rationale. Unfortunately these are the luxuries that the Indian Army can’t afford. Despite pulling out all the plugs in its repertoire of brutal tactics to suppress the struggle for freedom in the IHK and the centrifugal movements in the Indian North East the resistance to the Indian Army is increasing, calling for a greater commitment of troops on ground. In another epochal development Naxalism is emerging as a big threat in the hinterland that threatens to suck in the Indian Army into a vortex that would further exacerbate its problem placing an almost unbearable stress on the already overly stretched military resources. It is instructive to note that Indian Army has made it clear to its bosses that its hands are full and it is not in a condition to make contributions in thwarting the Red Threat of Naxalism. Matters are taking a turn for the worse because the command structure, responsible for managing soldiers’ morale in the first place, is itself crumbling rapidly. Officer-soldier interactive bonds have lost the traditional warmth because officers themselves have become prone to psychological breakdowns as underlined by rampant cases of insubordination, corruption, fake claims to win awards and resorting to fake encounters to build professional profiles.
Indian army is well aware of the perils and is doing all within its means to arrest the down ward spiral. It has institutionalized regular yoga classes at the unit level and appointed psychological counselors for providing advice to battalions involved in counterinsurgency operations. The hospitals looking after the formations in the insurgency infested areas have been made available the services of additional psychiatrists and wards have been added to cater to the increased flow of patients. But these stress management measures are not likely to mitigate problems of the Indian soldier because India is failing to address the underlying reasons which are causing the unwavering insurgency in the first place. The state of affairs pointedly calls into question the Indian Army’s claims of sustaining the pain of insurgency for unlimited period. The cracks in the Indian resolve are becoming manifest with every case of suicide and of fratricide and here lies the importance of the indigenous Kashmiri resistance in bringing India to the negotiating table for a resolution of the Kashmir Issue.


Understanding Asia: Is china best prism?
Tom Plate

THERE is an undercurrent of polite guerrilla warfare taking place behind the otherwise white-gloved frontage of the Asia Society here. In itself, the tussle would be simply interesting — indeed humorous — if it were not also important: It mirrors the world’s larger and arguably unhealthy over-preoccupation with the rise of China.
The Asia Society, a neat nonprofit, is committed to bettering understanding of Asia. It has its headquarters in New York, housed in a gorgeous building on Manhattan’s trendy Upper East Side. It has major branches in Los Angeles and Hong Kong. And, over the decades, it has been a very helpful educative and cultural institution. But suddenly there are serious questions about its identity. These questions mirror issues about the world’s own geopolitical shape.
The argument at the LA level is whether the issues, symposia and activities of the Asia Society have become overly Chinese. It’s like Franz Kafka’s Gregor Samsa: What if the Asia Society woke up one morning and found itself transformed into the China Society?
Not surprisingly, those raising this sort of issue tend to be society members who are not Chinese, whether by birth, nationality or ethnicity. More sarcastically put, the battle is over whether the Asia Society should remain named the Asia Society, an institutional title that implies an umbrella non-profit that highlights and celebrates all of what is in the region; or whether the Asia Society should simply re-brand itself as the ‘China’ Society.
That sardonic suggestion has been heard more and more in the Los Angeles area, with its vast diversity of Asian diaspora communities. In recent months the grumbling has come from all sorts of society members, whether huddling around corporate water-coolers, tennis-court pavilions or country-club drinking holes.
A recent luncheon featuring a visiting Chinese diplomat in a downtown LA hotel helped surface the issue anew. The speaker, though a distinguished ambassador of a high order, offered a set speech that could not have offered very much new to the assembled lawyers, doctors, bankers, professors and so on in the packed ballroom.