By Tom Mitchell in Beijing and Jonathan Birchall
Financial Times
October 23 2008

Walmart, the world's biggest retailer, yesterday told its Chinese suppliers to meet strict environmental and social standards or risk losing its business.

"Meeting social and environmental standards is not optional," Lee Scott, Walmart's chief executive, told a gathering of more than 1,000 suppliers in Beijing.

"A company that cheats on overtime and on the age of its labour, that dumps its scraps and its chemicals in our rivers, that does not pay its taxes or honour its contracts - will ultimately cheat on the quality of its products."

Walmart has been pursuing a drive to improve its reputation on environmental and social issues over the past three years, in response to growing criticism in the U.S. over issues including labour conditions in its supplier factories.

The directive, which will be codified in a Walmart suppliers' agreement, comes at a difficult time for China-based manufacturers, caught between rising production costs and the effect of the global financial crisis on consumer demand in their largest overseas markets.

The requirements include a clear demonstration of compliance with Chinese environmental laws, a 20 per cent improvement in energy efficiency at the company's 200 largest China suppliers, and disclosure of the names and addresses of every factory involved in the production process. The company will require a 25 percent rise in the efficiency of energy-intensive products, such as flat-screen TVs, by 2012.

Mr. Scott said the retailer also wanted to move away from the short-term focus that has characterised its relationships with Asian suppliers.

"We have traditionally purchased in a very transactional manner," said Mr Scott. "We need deeper, longer-term relationships with suppliers so it is not based on the last penny."

Some suppliers grumbled about the conditions spelled out by Walmart, which has a reputation for driving hard bargains. It is estimated that each year the company sells about $30 billion worth of China-made goods, giving it enormous negotiating power over suppliers.

"It's going to make things a lot worse," said one manufacturer at the meeting, who asked not to be identified. Others were more relaxed. "If they don't like it, they are not going to be doing business with Walmart," said one U.S.-based Walmart supplier who sources components from China.