(FORTUNE Magazine) – "This way, ladies! Follow me!" It's two weeks before the opening of Wal-Mart's first supercenter in Chongqing, and Baker Jiang, Wal-Mart's manager for western China, has invited a delegation of women on a tour. A small army of red-shirted associates greets the ladies at the door with a rousing Wal-Mart cheer. Inside, Jiang whisks the group around shelves piled with toys, sporting goods, and household appliances, past the new film-processing machines, and down the escalator to the produce department, butcher shop, and bakery where, donning mask and hairnet, he beckons visitors to inspect for cleanliness. Wal-Mart, he says, "will never use tap water to make your bread." By tour's end, it is the women who are cheering. "This blouse is so cheap," says one. "Can I buy it now?" Another gives Jiang a coquettish nudge. "We've waited so many years for this. What took you so long?"

Wal-Mart doesn't get that kind of reception in many parts of the U.S. these days. In its home market the giant retailer is under siege, blamed for evils from squeezing suppliers and crushing the corner grocer to busting unions and driving down wages. But good luck convincing Chinese consumers that the arrival of a supercenter should be cause for public outcry. In Chongqing, a metropolis of 31 million where shopping options have long been limited to dank, state-run stores with surly clerks or open-air markets where the tomatoes may or may not be as fresh as the garbage, the locals say, "Bring it on!"

"So what if they take business from other shopkeepers?" says 51-year-old Sheng Xuehua. "They should, if they can do a better job." Out on the street, construction worker Li Daping agrees. "We can't wait for Wal-Mart to open. We're practically counting the days."

Opening day, when it arrives June 30, brings pandemonium. There's a giddy rush when doors swing wide at 7:30 A.M. Thousands of shoppers scamper from aisle to aisle, heaping carts with spinach, cooking oil, whatever they can grasp. A truckload of roasted ducks sells out in minutes. By 8 A.M. the queue for rotisserie chicken at 85 cents a bird is 50 people long. Shoppers snatch five-kilogram sacks of rice as fast as employees can unload them. At tanks near the entrance, housewives lunge at live grass fish as long as their arms. At 9:30, a cadre of local officials joins Wal-Mart's Asia CEO, Joe Hatfield, for a ceremony on the public square outside. There's a brass band, fire-breathing Sichuan opera dancers, and a traditional lion dance. Hatfield paints the eye of a lion's head to bring good luck. But the gesture seems superfluous: Inside, each of the store's 75 checkout lanes is backed up 15 customers deep. By closing time at 10 P.M., 120,000 customers have trooped through the doors. But there is little time to savor success. Wal-Mart opens its next supercenter in Shanghai in less than a month. In the world's most populous market, the world's biggest retailer is playing catch-up.

Wal-Mart plans to roll out 15 new stores in China this year, including its first supercenters in Beijing and Shanghai, and it has enticed analysts with talk of increasing floor space by as much as 50% a year. Company executives won't elaborate on expansion plans, but Hatfield, a chain-smoking 30-year Wal-Mart veteran who has run the China operation since 1995, says his orders from Bentonville, Ark., are clear. At last year's annual meeting, held in Shenzhen, members of Wal-Mart's board admonished him to "get a lot more aggressive."

And no wonder. Wal-Mart can't sustain the astronomical U.S. growth rates of the past decade forever. Sooner rather than later, the company will need help from overseas. But the Beast of Bentonville has yet to emerge as a dominant player in any of the foreign markets that account for about 20% of its global sales. In Germany it is still struggling to stanch losses at the two retailers it acquired in the 1990s. In Japan it has yet to articulate a clear strategy for its 38% stake in the troubled Seiyu chain. The company has had better luck in emerging economies, such as Mexico, where there are fewer entrenched incumbents. But executives have long viewed China, with its vast population and booming economy, as their best bet for long-term global growth. In an interview with FORTUNE last year, former Wal-Mart CEO David Glass proclaimed China "the one place in the world where you could replicate Wal-Mart's success in the U.S."

It was slow going at first. The company sent an advance team of executives to China in 1994 and, two years later, opened the first Wal-Mart supercenter in Shenzhen, the gritty boomtown across the border from Hong Kong. Before the first store opened, an alliance with a Thai supermarket chain collapsed, forcing Wal-Mart to surrender planned developments in Shanghai and Shenyang. Beijing checked Wal-Mart's expansion with regulations, limiting foreign retailers to a handful of large cities and obliging them to offer at least 35% of each store to local partners. The Sam's Club format, with its emphasis on membership fees and high-volume sales, left Chinese customers cold. By the end of last year, Wal-Mart could boast just 43 stores in China--a far cry from the 3,719 it operates in the U.S. The company doesn't disclose financial results for China. But China's chamber of commerce reported in its annual retail ranking that Wal-Mart grossed $916 million last year--less than 2% of the company's international sales, and a tiny sliver of its $288 billion total revenue.

Those numbers have nowhere to go but up. The demographics are dazzling: 100 cities with populations of more than a million; 150 million urban families with annual incomes of more than $10,000 within the next ten years; more than $6 trillion in total retail spending this year, and growing at a 15% annual clip. And unlike India, which forbids foreign direct investment in the retail sector, China is opening its doors to outside players. The crucial turning point came last December, when Beijing, in keeping with terms of its admission to the World Trade Organization, granted foreign retailers permission to invest independently in any city they choose.

But many hurdles remain. Hatfield says his biggest challenge is finding qualified managers. Each supercenter, which mixes produce and general merchandise, requires hiring and training 500 employees. Locating sites is just as tricky. In most Chinese cities, municipal governments control prime real estate, giving an edge to state-owned retailers. And then there's the competition. In America, Wal-Mart may be the 800-pound gorilla, but in China, it's still a chimp, jostling with Chinese conglomerates such as the state-run Shanghai Brilliance group, as well as with foreign rivals such as France's Carrefour. Wang Zongnan, president of Brilliance, China's largest retailer with 3,300 stores and sales of $8.1 billion, says he doesn't lose much sleep worrying about Wal-Mart. "Local retailers have the advantage in all large economies," he says. "I see no reason to doubt that will be the case in China too."

Wal-Mart hopes to prove that thinking wrong. By opening in Chongqing, on the upper reaches of the Yangtze River, it is establishing a beachhead for expansion well beyond China's densely populated eastern seaboard. And to get it right, Hatfield and his lieutenants pulled out all the stops, working with development partners from Shenzhen and Singapore to secure a prime location at Nine Dragon Plaza, a public square across from the municipal zoo. The store is surrounded by residential developments and lies at the terminus of a new light-rail line. Store manager Sunny Han estimates that more than a million people live within a four-mile radius. But that same circle includes three stores operated by New Century, a retail group owned by the local government, as well as a lively street market and a gleaming new Carrefour as big as Wal-Mart. To lure customers, Wal-Mart will open an hour and a half earlier and close later, and it will deploy a fleet of free shuttle buses to ferry residents to the store.

At the open-air market on nearby Go Forward Street, peddlers hawking long beans and acorn squash were bracing for the worst a few weeks before the opening. "I'll definitely switch to Wal-Mart," said Liu Bijuan, a stocky housewife picking through baskets of eggplants and cucumbers. In a stall nearby, a butcher scratched himself lazily as flies swarmed over slabs of beef. But at the Carrefour up the road, it was a different story. The space is vast and well stocked. Shoppers thronged the food counter, and prices for many items were comparable to those in Wal-Mart stores.

Carrefour came to China a year after Wal-Mart but has expanded more rapidly. The French retailer's China CEO, Jean Luc Chereau, credits his success to the 12 years he spent building Carrefour's business in Taiwan. "It was in Taiwan that we discovered Chinese culture," he says. "By the time I moved to Shanghai in 1999, I was well prepared." But Carrefour has also demonstrated superior operating savvy and a greater tolerance for risk. By forging alliances with local governments, it circumvented many of Beijing's restrictions, fashioning a network of 60 hypermarkets in 25 cities, with sales last year of nearly $2 billion. This year China's largest foreign retailer vows to match Wal-Mart's China expansion store for store.

Still, it's early days, and Wal-Mart has deep pockets. More important, perhaps, is that Hatfield and his team have become adept at replicating Wal-Mart's corporate culture and figuring out what Chinese consumers want. Headquarters for Wal-Mart's retail operation--a dingy warren tucked behind the first supercenter in Shenzhen--reflect the company's reputation for pinching pennies. But Hatfield spends little time there. Most days you'll find him roaming Wal-Mart stores, scouting the competition, or foraging for products in urban street markets. "I'm a big believer in Sam's philosophy that when it comes to good ideas, you should steal shamelessly," he says. "You have to get out there and ask, 'What are our competitors doing that we're not?' You have to be hungry for new knowledge every day."

Hatfield's pursuit of local knowledge has produced surprising differences in the look and feel of Wal-Mart's stores in China. Chinese customers tend to do their shopping on foot, not by car. They have smaller apartments and smaller refrigerators, so they buy in smaller quantities and are accustomed to going to market every one or two days. So Wal-Mart supercenters in China devote lots of floor space to food. Perishable products get pride of place and come in a mind-boggling assortment of shapes, colors, and flavors. Except for the prices and the smiley faces, a U.S. customer venturing into the produce department at a Chinese Wal-Mart might think he had stumbled into a Whole Foods store in San Francisco.

Wal-Mart's managers have learned a lot about Chinese customers. One early discovery: They want to put their hands on the merchandise, shucking each corncob before putting it in their basket, or demanding that associates not only take a fitted sheet out of the plastic but demonstrate it on an actual bed. Chinese shoppers also have a thing for clamor. Often managers can goose sales simply by dispatching associates to restack an item noisily in the middle of the floor. And at the Chongqing opening, bottles of red wine moved briskly when bundled with free cans of Sprite. (In China they like their cabernet carbonated.)

The fare can get a lot more exotic than that. Since the SARS epidemic two years ago, Wal-Mart's China stores have stopped slaughtering poultry on the premises and no longer offer rabbits or snakes. But spicy chicken feet and stinky tofu are perennial favorites. In Chongqing, those who come too late to catch a grass fish can choose from a selection of lobsters, turtles, and live bullfrogs the size of soccer balls. At most supercenters, the bestselling items are prepared lunches served in Styrofoam containers: two meats, two vegetables, rice, and a cup of hot soup, freshly prepared onsite--all for less than $1. A typical supercenter sells more than 1,000 a day. Hatfield says the sight of truck and taxi drivers retching on the side of the road helped convince him that there was an opportunity for Wal-Mart to boost midday store traffic by luring customers from local street vendors.

Another innovation is what Wal-Mart calls "retail-tainment." Stores provide space for local school groups to perform, and they organize daily activities for the elderly. Residents are welcome to wander in and freeload on air conditioning. It's savvy marketing, of course. But it may have long-term benefit: If Wal-Mart can succeed in weaving itself into the fabric of urban communities, it may head off the image problems that have arisen in other markets.

Unlike the merchandise, Wal-Mart's management practices have required little tinkering for China. If anything, the red shirts, mass cheering, incessant pep rallies, and veneration of a deceased founder seem characteristics far better suited to the People's Republic than the American South. Two hours of buttonholing Chongqing associates as they left work failed to identify anyone who would confess to feeling oppressed. What's striking about all this regimentation, though, is that it's so focused on answering the wants of individuals. At times, Baker and Sunny, with their folksy PR tours and community-outreach projects, seem like old-time Boston ward heelers.

Another constant is the obsession with tian tian ping jia--everyday low prices. Hatfield, darting around a supercenter in Shenzhen, ticks off item after item: "Men's dress slacks? Eight bucks--and that's including alterations. Those dress shoes? $4.80. They were three times that two years ago." Wal-Mart lured customers to the Chongqing opening by advertising DVD players for $23.97 and in-line skates for $11.93. Often products are displayed with signs declaring the value of the discount wrested from suppliers by Wal-Mart buyers.

Although Wal-Mart's shelves bristle with U.S. consumer brands--from Crest toothpaste and Clairol shampoos to Oreos and Gatorade--almost everything is made in China. And, as in the U.S., suppliers have trouble sorting out whether Wal-Mart's embrace is a bear hug or a death grip. Consider Dong Yongjian, the 33-year-old proprietor of a spicy-chicken-feet factory an hour's drive from the Chongqing store. Wal-Mart buyers stumbled on Dong's product four years ago at a rival retailer in Shenzhen. They sent a team of auditors to inspect his factory and began stocking his chicken feet in stores. Dong's chicken-feet recipe--which he guards as zealously as Colonel Sanders did his "secret blend of 11 herbs and spices"--was an immediate hit. Wal-Mart has become Dong's top customer. But while sales are booming, profits aren't. "They want the lowest prices I can possibly give them," says Dong. "I see this is a long-run relationship, so I'm doing my best to hold down costs." At the headquarters of Yunan Red Wine, a salesman says that to win Wal-Mart's business his company had to knock prices down 15%, undermining its pricing power with other customers.

If the associates on the sales battlefront in Chongqing represent one face of Wal-Mart's operation in China, suppliers waiting in the reception area of Wal-Mart's global procurement headquarters in Shenzhen are another. The room, with a poster of Sam Walton on one wall and Wal-Mart's latest share price on another, is an exporters' purgatory. Supplicants take a number and wait for an audience with Wal-Mart buyers or quality inspectors. Those whose products are deemed worthy of Wal-Mart's U.S. customers can see sales rocket almost overnight. Many come bearing items of whimsy--dancing Christmas trees, Jar Jar Binks action figures, Nerf dart sets. But this is a tense place. On a recent afternoon, there was no mirth in the eyes of Li Xiaolong as he stepped into a tiny conference room, strapped on the target-shaped vest manufactured by his Dongguan employer, and waited for a Wal-Mart buyer to fire Nerf darts into his chest. Last year Wal-Mart spent $18 billion on merchandise from China-based suppliers, most of it toys, footwear, Christmas decorations, and sporting equipment, accounting for 3% of China's total exports. If Wal-Mart were a country, it would be China's sixth-largest export market.

Wal-Mart buys only about 10% of what it sells in U.S. stores from suppliers in China. But at a March meeting for investment analysts in Shenzhen, company executives spoke of raising China purchases significantly--to perhaps double the current amount--over the next five years. Critics say that pits American workers against Chinese, who earn $5 a day. Andrew Tsuei, head of Wal-Mart's overseas procurement office, offers no apologies. "My job is to find the best value for our customers while sourcing in an ethical way," he says. "China gives us competitive products and meets our quality and ethical standards. There's no reason for us not to buy here."

Wal-Mart executives say they hold suppliers to U.S. standards for business ethics as well as product quality, dispatching hundreds of auditors to monitor working conditions, compensation, and safety records--though Tsuei acknowledges that gauging compliance is a challenge. In China, as in the U.S., Wal-Mart has resisted calls for labor unions. Chinese associates, however, aren't up in arms. That's because Chinese unions are creatures of the state, run to collect dues for the party and keep tabs on workers, not represent them. In November, after months of public sniping by the government-controlled All China Trade Federation, Beijing and Bentonville reached a compromise. Wal-Mart pledged to accept a union should workers formally request one. Thus far they have not.

Given the scope of Wal-Mart's ambitions in China and the enthusiasm of Chinese shoppers at recent store openings, Bentonville's stated expansion plan looks way too timid. Merrill Lynch analyst Daniel Barry calculates that even if Wal-Mart adds stores at a rate faster than this year's pace, its China retail network will include no more than 230 stores by 2009. That's fewer than the number of stores Wal-Mart will add in the U.S. this year.

Maybe Wal-Mart is just playing its China cards close to the vest. In the U.S., the company's pattern has always been to keep its head down and its mouth shut--until it has piled up all the chips. Wal-Mart International spokesman Elizabeth Keck says that, although Wal-Mart doesn't make projections more than a year out, "it is not correct to assume that we only plan to open 15 new stores a year in China." She also hints at the possibility of growth through acquisition. But her boss, Wal-Mart's International CEO, John Menzer, isn't tipping his hand. "We'll take one store at a time," he told reporters in Beijing this spring.

Back in Chongqing, Joe Hatfield has few doubts about the company's success. Walking into the store after the opening ceremony, he is almost run over by a couple wheeling two large shopping carts piled high with sacks of rice. Does it worry him that on opening day customers have loaded up so heavily they won't need to return to the store for months? "Nah," he laughs, waving to the pair. "Those two'll be back tomorrow. They gotta buy vegetables."

REPORTER ASSOCIATES Susan M. Kaufman, Joan Levinstein, and Wang Ting

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