China Consumer

Curtain call

IKEA faces a dispute with its key Chinese suppliers as it seeks to lower costs

Curtain call

She has her eyes on the low prices

Low prices have long been IKEA’s main strategy to survive in China, a market it entered a decade ago. In fact, the furniture giant’s China operations are more tightly focused on price than any of its other stores around the world thanks to the intense competition it faces (and the challenge from rampant counterfeiting). To woo Chinese shoppers, IKEA has cut prices to some of its lowest globally, offering, for example, Rmb1 (or 16 American cents) ice-cream cones and Rmb9.9 dining table place mats.

In fact, in the last decade IKEA brought prices down by over 50%. “Over the past years we have dramatically reduced our prices in China,” chief executive Mikael Ohlsson told Bloomberg in June. “We will continue with that this year and also next year to be more affordable for more people.”

While its relentless cost-cutting has won over shoppers, it has caused enormous tension with its key suppliers. Last year, more than a dozen IKEA suppliers have ended their contract with the company. Some domestic manufacturers told CCTV that they would rather shut down their factories than work for IKEA again.

“We simply cannot make any money from being their contract manufacturer,” Song Shihou, chairman of Houcheng Wood in Heilongjiang province, declares.

Most factory owners concur that business was good when they first signed on to become contract manufacturers with IKEA. The Swedish retail giant offered them funding and provided technology know-how. However, last year orders were down as demand from Europe sank while their profits were further eroded with the soaring cost of raw materials and labour.

Many of them expected IKEA to give them a break on the cost side. But instead, the Swedish firm demanded even lower prices than a year ago. Last year, the prices of its products dropped 2.6% on average, reports CBN. The company said its plan is to lower prices 2%-3% on average every year.

Suppliers complain that while IKEA pressed for lower prices, it refused to lower its high quality standards. The Swedish furniture giant hired a third party to conduct quality tests on all the products. And even though the standards were set by IKEA, the tests were paid for by the suppliers, says CBN.

“IKEA trained all the factories here [in Heilongjiang province] and then it decided to kill us,” complains Cao Yuewei, whose company Heilongjiang Naili makes 60% of IKEA’s curtains globally.

Still, Peter Wisbeck, IKEA Greater China purchasing manager, claims that while labour and material costs have climbed over the years it doesn’t mean the company expects its purchasing costs to go up. Wisbeck reckons that the rise in costs can easily be offset by efficiency in management and improvements in the utilisation of raw materials.

His suppliers, meanwhile, are fed up. Since the beginning of last year, more than 10 of IKEA’s largest Chinese suppliers including Houcheng and Naili have joined forces to launch a new furniture chain called Jiayimei, which incorporates the two Chinese characters that make up IKEA’s name in Chinese ‘Yi Jia’.

“Rapidly seizing the market share by copying the IKEA model is our goal,” Li Junming, Jiayimei’s executive director, brazenly told 21CN Business Herald. “There is still big market space for household industry… IKEA is expanding so slowly that up till now it only operates 11 stores in China. We will open 200 stores in three years!”

China Furniture Net, an industry portal, is sceptical. While it is easy to knock off IKEA’s stylish designs, copying the business model is not so easy to do. “It doesn’t matter how many times you go to the IKEA stores to study their layout or how closely your products resemble IKEA’s, the success of IKEA is in its consumer research and its grasp of the shoppers’ psychology as well as their seamless control in supply chain management – both upstream and downstream,” says the website.

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