Wynn Resorts, Wal-Mart: One coin in the world economy

Big fish Chinese gamblers afraid of a corruption crackdown and poorly paid Wal-Mart workers in the United States might seem to have little in common. But in the global economy, they are in some ways two sides of the same coin, and to understand that is to understand more than why the two disparate groups were blamed for horrendous earnings at two very different companies: Wal-Mart and Wynn Resorts. The globalization of the past 25 years has been kind to both companies, as cheap labour from China became integrated in the global economy, creating, among many phenomena, great new wealth in China and a buyer’s market for labour in the United States. Now we may be seeing the early stages of a partial reversal of some of those trends, as China seeks a new economic model and politics and economics in the United States are giving wage earners more bargaining power. Wal-Mart’s stock is down more than 12 percent since it said on Wednesday that earnings would fall 6-12 percent this year, a decline it blamed in part on higher wage bills. The retailer said in April it was bumping hourly pay up to at least US$9 for all U.S. employees, with another dollar-per-hour hike to come in February. Overall, Wal-Mart says it will spend US$1.2 billion to US$1.5 billion on higher wages and training next year. Wynn Resorts has a very different species of problem: too few Chinese high-rollers willing to be seen betting fortunes on the flip of a card. Not only are more gamblers now in fear of a crackdown on corruption underway in China, but President Xi Jinping’s efforts are creating a hostile environment for casinos in formerly wide-open Macau. “In my 45 years of experience, I’ve never seen anything like this before,” Wynn CEO Steve Wynn said on Thursday, describing the difficulty of what he called an “almost mystical” planning process on the Chinese-administered island. Wynn Resorts said profits fell more than a dollar per share to just 86 cents, driven by a 38 percent fall in Macau revenue and a near halving of the VIP junket business that brings rich gamblers to the tables from the Chinese mainland. Wynn shares, down more than 50 percent thus far this year, fell sharply in Asian trading before recovering somewhat the following day in U.S. hours. Business models Gambling in Macau, to be sure, is particularly vulnerable to a number of trends in China. Not only is an economic slowdown hitting the cash flow of those who gamble, but the corruption crackdown has taken particular aim at the industry. So-called junkets, short trips to Macau, are seen both as a symbol of corruption and a means for officials and others to launder cash or simply to evade Chinese capital controls. Still both businesses – Wal-Mart and Wynn Resorts – had business models that were part beneficiaries of and partly predicated on long-running global trends. As China rose, integrating its huge and underutilized labor force into the global economy, its share of world trade rose from less than 3 percent in 1990 to 12 percent today. Great wealth was created, both in China and the rest of the world. Macau, gambling and Wynn all were beneficiaries of occupying an intermediate space between tightly controlled capital and the rest of the world. Gamblers had good reason not just to want to live a little, but to want to get a bit offshore. On the other side of the world, Wal-Mart did well out of selling goods, many of them made in China, cheaply to a middle- and lower-income clientele whose incomes were being whittled away in real terms as U.S. manufacturing jobs went offshore. Those U.S. workers were both keen to find a bargain and, lacking better-paid options, willing to work for comparatively little. China now is at or past a demographic tipping point, with little excess labor to absorb. The plan instead: to move toward a more domestically focused, consumer-based economy. That change ultimately may be successful, but in the meantime China sees the need to crack down on arrangements and practices, like the junkets, that it previously tolerated. Wal-Mart, conversely, finds itself also affected by the same mega-trend of an aging China. Not only has U.S. unemployment fallen, potentially giving workers more negotiating power, but after decades of falling real wages, the U.S. political debate has changed, with more pressure for higher minimum wages. In other words, as surplus labor supply dries up in China and elsewhere, largely for demographic reasons, business models everywhere will come under pressure. Lower margins are likely for labour-intensive U.S. companies, and the pie will be divided differently, with different winners and losers in China.