IKEA IN CHINA
Biggest Market in the World Hanaa Ibrahim El Sayad Mohamed Foad El-Karany Hoor Elmorshdy Amira Gad Noha ARazek Ahmed Ahmed Mohamed-Samy International Finance Project Winter 2017 Table of Contents
CHAPTER ONE: Introduction.......................................................................................................5
1.1 Back ground about IKEA......................................................................................................5
1.2 The colors of IKEA and development of its brand logo........................................................5
1.3 Store Format and Design......................................................................................................6
1.4 Entry of IKEA in Different International Markets................................................................8
1.4.1 Entry of IKEA in China.................................................................................................8
1.4.2 Entry of IKEA in Russia..............................................................................................10
1.5 Definition and Classification of Risk in International Trade...............................................11
1.5.1 Definition of Risk.........................................................................................................11
1.5.2 Classification of Risk...................................................................................................11
CHAPTER TWO: Commercial Risks...........................................................................................13
2.1 Weak Partner - The suppliers of IKEA in China.................................................................13
2.2 Operational Problems.........................................................................................................13
2.2.1 Shoppers Behavior.......................................................................................................13
2.2.2 DIY Preferences...........................................................................................................15
2.2.3 Adapting to Customer’s Changing Needs – Changes in Size of Apartments................15
2.2.4 Stores Locations...........................................................................................................15
2.3 Timing of Entry...................................................................................................................15
2.4 Competitive Intensity..........................................................................................................16
2.5 Poor Execution Strategy.....................................................................................................17
2.6 Different Types of Commercial Risks and Mitigating Strategies........................................19
CHAPTER THREE: Currency (Financial) Risks..........................................................................21
3.1 The Finance Strategy of IKEA............................................................................................21
3.2 Purchase Strategy................................................................................................................22
3.3 Foreign Direct Investment in China....................................................................................24 1 IKEA in China International Finance Project Winter 2017
3.4 Financial Risks facing IKEA in China................................................................................26
3.4.1 Currency Exposure.......................................................................................................26
3.4.2- Asset valuation............................................................................................................27
3.4.3 Foreign Taxation..........................................................................................................28
3.4.4 Inflationary and Transfer Pricing.................................................................................28
3.4.5 Foreign Exchange Risk................................................................................................29
3.5 Summary of the Financial Risks and how to mitigate it......................................................32
CHAPTER FOUR: Country Risks................................................................................................33
4.1 Assessing the International Environment............................................................................33
4.1.1 Country Analysis and International Entry....................................................................33
4.1.2 Cultural Assessment.....................................................................................................36
4.1.3 The Chinese Market: Huge Potential and High Risk....................................................37
4.2 Country Risks that faced IKEA in China............................................................................38
4.2.1 Government Intervention, Protectionism and Barriers to Trade and Investment..........38
4.2.2 Bureaucracy, Red Tape, Administrative Delays and Corruption...................................39
4.2.3 Lack of Legal Safeguards for Intellectual Property Rights...........................................40
4.2.4 Legislation Unfavorable to Foreign Firms...................................................................41
4.2.5 Economic Failures and Mismanagement......................................................................43
4.2.6 Social and Political Unrest and Instability...................................................................44
4.2.7 Different Types of Country Risks and Mitigation Strategies........................................44
CHAPTER FIVE: Cross Cultural Risks.......................................................................................46
5.1 Introduction to the Chinese Culture....................................................................................46
5.2 Cultural Differences............................................................................................................48
5.2.1 Language Difference....................................................................................................48
5.2.2 Cultural Risk:...............................................................................................................48
5.2.3 Personality as affected by culture.................................................................................49
5.3 Negotiation Patterns............................................................................................................51 2 IKEA in China International Finance Project Winter 2017
5.4 Decision Making Styles......................................................................................................52
5.5 REGULATIONS & ETHICAL PRACTICES.....................................................................52
5.6 Different Types of Cross Cultural Risks and Mitigation Strategies....................................54
REFERENCES.............................................................................................................................56 3 IKEA in China International Finance Project Winter 2017 List of Figures Figure No. Description Page No. Figure 1.1 Flag of Sweden Figure 1.2 Evolution of IKEA Logo Figure 1.3
Typical Shopper’s Path in an IKEA Store Figure 1.4
Types of Risk in International Trade Figures 2.1
Sleeping in IKEA Stores in China Figure 2.2
Sleeping in IKEA Stores in China Figure 2.3
Change in the Operations of IKEA in China to suit the market Figure 3.1
Organization Structure of the Inter IKAE group Figure 3.2 US Profitable Firms in China Figure 3.3 The Annual Inflation in China Figure 3.4
IKEA Asia Treasury Centre (IATC) – cross-border CNY/CNH pool account operations Figure 4.1
Some of the key events during China’s opening up (1978- 2003) Figure 4.2
Examples of encouraged, restricted and prohibited industries in China Figure 4.3
“11 Furniture” – is one of the most notorious IKEA imitators. Yellow and blue company colors Figure 4.4
Demonstration of the Danger of IKEA furniture unit Figure 5.1 Photo of the leader Mao Zedong List of Tables Table No. Description Page No. Table 2.1
Different Types of Commercial Risks and Mitigating Strategies Table 3.1
Foreign direct investment in China Table 3.2 Sectors invested in China 2016 Table 3.3
Strong and weak points of Chinese Market Table 3.4
Different Types of Financial Risks and Mitigating Strategies Table 4.1
Different Types of Country Risks and Mitigating Strategies Table 5.1
Culture differences between China and Sweden Table 5.2
Different Types of Cross Cultural Risks and Mitigating Strategies 4 IKEA in China International Finance Project Winter 2017 CHAPTER ONE INTRODUCTION
1.1 Back ground about IKEA
The name IKEA comes from the initials of the founder, Ingvar Kamprad, his farm
Elmtaryd, and his county, Agunnaryd, in Småland, South Sweden (Moon, 2004). Since
IKEA’s humble beginnings in 1943 on Kamprad s small farm, to opening it’ ʼ s first
furniture showroom in Almhult, and later large scale Scandinavian and international
expansion in Europe, North America, Asia Pacific and Russia/Ukraine, IKEA has become
one the world’s most successful global retailers (Hill & Jones, 2005; Jonsson, 2008;
Moon, 2004). Today IKEA has 389 stores in 48 countries and is visited by 915 million
shoppers annually (IKEA website, 2017).
IKEA’s advertising and promotion is dominated by the catalogue; a marketing instrument
that is unusual for an international retailer but at the core of the marketing strategy of
IKEA. It is the most important marketing tool as can be seen by the fact that 70 % of the
annual marketing budget is spent on the catalogue. It is produced in 38 different editions,
in 17 languages for 28 countries. The catalogue is produced in-house with a standardised
layout, with the same products and same overall information; adjustments for editions in
different countries or regions are fairly minor (Johansson and Thelander, 2009).
1.2 The colors of IKEA and development of its brand logo
To build a presence in Germany, it was decided to push the Swedish origin of IKEA by
painting the stores in the colors of the Swedish flag (Figure 1.1), blue and yellow. IKEA
soon realized that painting the stores blue and yellow would make it easier for them to
stand out in other areas where there are many other retailers. 5 IKEA in China International Finance Project Winter 2017
Figure 1.1 Flag of Sweden
Over the years IKEA has also changed its brand logo as can be seen in Figure 1.2
Figure 1.2 Evolution of IKEA Logo (https://www.bebrilliant.com/be-brilliant-
blog/2014/10/21/brand-experiences-part-3-ikea)
1.3 Store Format and Design
IKEA stores follow a fixed basic format. The size of an IKEA store has increased over
the years. Currently the smallest standard stores that are built are 32,000 square meters
and the largest are 45,000 square meters. Having standard stores is also in line with the
general cost-efficiency goal. As land is expensive to buy in some markets, IKEA has
currently developed buildings with several floors, with parking lots both in the basement
and on the roof. This is an example of how the Concept in Practice needs to be adjusted
to meet local peculiarities. A selection of furniture is displayed in room- like settings,
adjacent to which is the self-service warehouse section, with the ready-to-assemble
furniture placed in boxes on pallets. All stores also follow a "traffic flow" that takes
customers through the store in a manner that maximizes the exposure of IKEA products
in different settings (Bartlett, 1990). All stores have a restaurant with essentially the same 6 IKEA in China International Finance Project Winter 2017
menu (IKEA is Sweden's largest food exporter), in-store child care in the form of
supervised play areas and ballrooms, hot dog/hot sausage stands, and food markets with
traditional Swedish food near the exits, etc. (Jonsson and Foss, 2011). A typical journey
in a store is seen in Figure 1.3.
Figure 1.3 Typical Shopper’s Path in an IKEA Store (Source: Cordes, 2015). 7 IKEA in China International Finance Project Winter 2017
1.4 Entry of IKEA in Different International Markets
According to concept of Alexander and Myers (2000), IKEA’s vision to offer products with good
design and functioned products at low price by using innovative idea is the driver of change that
drive the company to internationalize. IKEA possess some ownership advantages which include
not only creative concept and technologies but also the experience, leadership, perception and
attitudes to expand the company in international market. The company begins to go to
international market starting with the country near by the market of origin in Scandinavian and
other distant countries later on
The international expansion of IKEA started in 1963 with the opening of its first store in
Norway. From that moment on IKEA showed a massive expansion. The first IKEA store
outside Scandinavia was opened in Zurich in 1973. The success in Switzerland paves the
way for a rapid expansion into Germany, today IKEA’s largest market. IKEA arrived then
in Australia and Canada, in 1976 and 1977respectively. The expansion in Europe
continued in Austria (1977), the Netherlands (1979), France (1981), Belgium (1984), UK
(1985), Italy (1989), Hungary (1990),Poland (1991), Spain (1996), Russia (2000),
Portugal (2004). IKEA opened its first store in USA in 1987 and in Japan in 2006 (Giunta, 2016).
1.4.1 Entry of IKEA in China
The driver of change affects location decisions, entry method and strategy of IKEA. The
decision of IKEA to enter China comes from those supporting environments which are
political and social and economic conditions allowing IKEA to beneficial exploit
advantage in Chinese market. The adjustment of law and regulation to attract foreign
investment, the rapid economic growth, the huge demand in domestic market and
abundant of raw materials and labors for furniture manufacturing are push and pull
factors that lead IKEA to enter and exploit Internationalization of IKEA in the Japanese
and Chinese markets 2008 Master thesis- Group 2022 35 advantages in Chinese market
(Capdevielle, Li & Nogal, 2007). At this point, location advantage highly influences the
expansion of IKEA to China (Dunning, 1981, 1988).
IKEA entered China in 1998 opening its first retail store in Shanghai followed by another
store in Beijing in 1999. IKEA was one of the first furniture-company to establish its 8 IKEA in China International Finance Project Winter 2017
presence in China. The company’s trading partnership with China dates back to the early
1960s. IKEA had therefore a solid network of Chinese suppliers and a good
understanding of the Chinese furniture industry when it entered the Chinese market. Over
the years, IKEA expanded its presence in China opening new retail stores (Beijing,
Guangzhou, Nanjing) and establishing several trading offices and a purchase center.
In 1998 when IKEA first entered into the mainland China, it set up a joint venture with a
local partner in Shanghai (Fong, 2006), and open its first store by renting land from
government. According to Linda Xu, this entry mode choice was made passively, “As a
retail company, joint venture was the sole way to operate business in China because at
that time, the retail industry has just opened and the Chinese government set many
restrictions on regions and in entry mode. IKEA opened retail stores in the regions that
were allowed; Nonetheless, IKEA selected its partner and maintained full management
control of their partner (Jonsson, 2007).
Also, this strategy minimizes financial risk and enables IKEA to handle with distant
market (Evans et al, 2000). Moreover, joint venture provides IKEA a great opportunity to
build partner and relationship with suppliers in China and make China became one of
important supply center of IKEA in Asia (Carpell, 2006)
Linda Xu stressed the influence of institutional factor by arguing that IKEA was heavily
constrained by institutional pressures and couldn’t make decision out of the company’s
own interests, and there were no chances for other factors to play a role. Obviously, for
IKEA’s first entry, the institutional factor played a dominant role because of the coercive
power from the government. In a later stage, IKEA changed this entry mode as soon as
new policies rolled out allowing foreign retailers to build wholly owned stores (Wang, 2011).
Before 2001 IKEA had only two retail stores in China, which were located in Shanghai
and Beijing respectively, those two stores were opened under IKEA’s joint ventures, but
after China joined the WTO and the government allowed foreign retailers to establish
wholly owned subsidiaries, IKEA promptly purchased the remaining shares from their
partners and wholly owned the stores, furthermore, when IKEA expanded into other 9 IKEA in China International Finance Project Winter 2017
cities of China from 2004, they adopted the same strategy of buying land and built their own stores (Wang, 2011).
The decision of entering the Chinese market was prompted by the economic growth
recorded since the beginning of the 1980s. Industrialization, rising incomes, better
education, postponed life stages, urbanization and the widespread of Western values give
birth to a growing middle classes with new needs and consumption patterns. The Chinese
middle class has been growing incredibly fast: the per-household disposable income of
urban consumers is expected to double from about $4000 to about $8000 between 2010
and 2020 (Atsmon & Magni, 2012).
China has enjoyed more than 20 years of rapid economic development since it opened its
doors to the international market with open door policy started by Deng Xiao Ping in
1978. The GDP has been increasing steadily by an average annual increase of 7–8 %.
Due to the increased purchase power of Chinese consumers and the growing popularity
of Western values, demand for high-end Western products soared. It is estimated that
China currently has approximately 30 million middle class consumers with annual
incomes ranging from $10,000 to $50,000.
The healthy economy coupled with rising income and a booming estate market provided
impetus to the growth in Chinese furniture market. After the housing reform in the
Chinese mainland, demand for privately owned homes has been constantly increasing in
both urban and rural areas, leading to a consequent surge in furniture sales.
However, the high import taxation the complex government regulation, strong
competition of local players and the complexity of the consumer buying behavior,
entering the Chinese market can prove extremely difficult (Giunta, 2016).
1.4.2 Entry of IKEA in Russia
On 17 August 1998 Lennart Dahlgren, the general director of IKEA Russia, arrived in
Moscow to set up the company's first superstore. He walked into an unfolding economic
crisis as he had arrived on the same day that the Rouble crashed, losing three-quarters of
its value against the dollar overnight. “I was a bit shaken, but my friends from other
businesses said I was lucky, as it would be much easier to invest following the 10 IKEA in China International Finance Project Winter 2017
devaluation. And it was. There was a complete change in attitude. Where the authorities
were difficult and arrogant before, after the crisis they welcomed foreign investors with
open arms,” says Mr. Dahlgren sitting in the airy, open-plan office you would expect of
the world's leading furniture producer. IKEA had already tried to set up in Russia twice –
once in 1988 shortly before the Soviet Union's collapse and again in 1993 when Boris
Yeltsin unleashed tanks in the capital – the first store opened with much fanfare in March
2000 and a second followed a year later. IKEA had already invested $400m, buying its
60-plus suppliers equipment and granting credit for investment and working capital – as
Russian companies' biggest headache is their inability to borrow from the local banks.
The company planned to invest another $600m over the next five years (Ditter, 2011).
1.5 Definition and Classification of Risk in International Trade
1.5.1 Definition of Risk
Risk can be referred as the chances of having an unexpected or negative outcome. Any
action or activity that leads to loss of any type can be termed as risk.
1.5.2 Classification of Risk
Figure 1.4 Types of Risk in International Trade (Source: Dinu, 2015)
Risks can be classified into the categories shown in Figure 1.4 (Dinu, 2015): Commercial risk
This refers to probable losses arising from the market or the transaction partners.
An important measure is to secure that the trading partners are reliable. It is also 11 IKEA in China International Finance Project Winter 2017
important to take into account the partner's possible bankruptcy or indisposition to
pay. Weak partner, operational problems, competitive intensity, and poor
execution of strategy are all forms of commercial risks. Commercial risk faced by
IKEA shall be discussed in Chapter Two. Financial risk
This is risk that contains financial loss to organizations. This type of risk usually
appears as a result of instability and losses in the financial market produced by
changes in interest rates, currencies, stock prices, and much more. It also includes
currency exposure, asset valuation, foreign taxation, inflationary, and transfer
pricing. Financial risk faced by IKEA shall be discussed in Chapter Three. Country risk
Country risk refers to the possibility that fluctuations in the business environment
in another country where companies are doing business may impact badly their
operations or payment for imports resulting in a financial loss. It includes
sovereign risk, which is a subdivision of risk generally connected to the
government or one of its agencies refusing to comply with the terms of a credit
agreement. Other forms of this risk include: government intervention,
protectionism and barriers to trade and investment, red tape, lack of safeguards for
intellectual propriety rights, legislation unfavorable to foreign firms, economic
failures, social and political instability. Country risk faced by IKEA shall be discussed in Chapter Four.
Cross-cultural risk
These risks occur where a cultural miscommunication puts human value at stake.
Examples of this are cultural differences, negotiation patterns, decision making
styles, ethical practices. Cross-cultural risk experienced by IKEA shall be discussed in Chapter Five. 12 IKEA in China International Finance Project Winter 2017 CHAPTER TWO COMMERCIAL RISKS
2.1 Weak Partner - The suppliers of IKEA in China
In 2013 some of the suppliers who have been working with IKEA for more than 10 years
have decided to stop delivering products to the IKEA supply chain. The reason for this
has been pressures put by IKEA on the suppliers to further reduce their prices. However,
with increased costs in raw materials and labor, the suppliers could not break even. Now
IKEA is conducting negotiations with new suppliers (ANON-2, 2013).
2.2 Operational Problems 2.2.1 Shoppers Behavior
Among all the countries that IKEA operates in the world they faced a challenge with
Chinese shoppers. It is reported that people treat the shops as a furniture theme park.
They occupied every furniture piece, sleeping or sitting on it for hours. They sleep
because the air conditioned stores provides them with an escape from the heat outside.
Some people use the designs as a background to take selfies pretending that they were in
their house. Children play on toys in the showroom as if they are in a public park (Hatton,
2013). However, IKEA store managers have not been too upset about this. This behavior
is illustrated in Figures 2.1 and 2.2. 13 IKEA in China International Finance Project Winter 2017
Figure 2.1 Sleeping in IKEA Stores in China (Source: Kevin Frayer/Getty Images)
Figure 2.2 Sleeping in IKEA Stores in China (Source: Kevin Frayer/Getty Images) 14 IKEA in China International Finance Project Winter 2017 2.2.2 DIY Preferences
IKEA had to adapt its DIY (do-it-yourself) concept to the Chinese realities. Since labor is
cheap there, most of the people don’t feel like assembling furniture themselves. Whereas
in the west, customers look at DIY as a chance to save money. For this reason, IKEA in
China offers fee-based assembly services and provides local home delivery and long-
distance delivery to major cities in China (Kornienko, 2016).
2.2.3 Adapting to Customer’s Changing Needs – Changes in Size of Apartments
IKEA, which offers same range of products in every country, certainly couldn’t adapt
them for every one of them. Since typical Chinese apartment is quite small, IKEA’s
furniture was a bit bulky in the beginning. This is why Swedish retailer had to adjust
product sizes so they will be in tune with reality. Additionally, layout of the IKEA store
matches typical size of the apartments and also includes a balcony section (since most
apartments have it) (Kornienko, 2016).
In terms of housing, the average square meters per person in China has been increasing
considerably. Until recently, apartments averaged 40 m ; now Beijing and Shanghai 2
apartments’ average 80 m . This means several things: Chi 2 nese residents need more
furnishings and, because consumers are buying more gadgets, they need more storage
containers and facilities. It also means IKEA needs to keep its home-life study up-to-date
because change happens so fast (Miller, 2004). 2.2.4 Stores Locations
Store location should reflect the reality of the market condition as well. Traditionally,
IKEA stores are situated away from the city, this why shoppers usually travel there by
car. In China, however, percentage of car ownership is not high. Therefore, IKEA had to
situate its stores on the outskirts of the city so people can go there using public
transportation (Kornienko, 2016). 2.3 Timing of Entry
The Chinese government allowed foreign investments in the real estate industry in the
mid 1990s. As the construction of commercial and residential establishments increased, it
also boosted the sales of home decoration and furnishings companies. The demand for 15 IKEA in China International Finance Project Winter 2017
housing increased considerably over the late 1990s and early 2000s. Increased home
ownership further boosted the home improvements and decoration market. People wanted
better quality products. To fill this need, many foreign home decoration and furnishings
companies like B&Q entered China during the 1990s. IKEA started its retailing
operations in China with the opening of its first store in Shanghai in 1998 (ICMR, 2005).
IKEA is a later comer in Chinese furniture market. They missed the best time to enter
China market as there were more than 100,000 domestic furniture markets in China when
IKEA started there. There were more than 40 furniture markets just in Beijing. (Li, 2007).
2.4 Competitive Intensity
In the Chinese market IKEA had to compete with a number of rivals both local and
international. The local competitors include Qumei group, Markor Furniture
International, Royal Furniture and Chengdu QuanU furniture Co, whilst the international
competitors included OBI from Germany, B&Q from the UK, and Hola from Taiwan. All
of these competitors exercised a pressure on IKEA’s initial prices as they were selling at
lower prices (Giunta, 2016). IKEA reduced the prices drastically. One example is the
price of its “Lack” table that has dropped to 39 Yuan from 120 Yuan when IKEA first
came to the Chinese market (Hansegard, 2012). 16 IKEA in China International Finance Project Winter 2017
2.5 Poor Execution Strategy
Figure 2.3 Change in the Operations of IKEA in China to suit the market (Source: )
At the start of the operations in China, IKEA operated in the same manner as they were
operating in Europe, but they had to quickly change their mode of operation as seen in
Figure 2.3 above to suit the Chinese market.
As the company opened more stores from Beijing to Shanghai, the company's revenue
grew rapidly. In 2004, for instance, its China revenue jumped 40 per cent from the year
before. But there was a problem - its local stores were not profitable.
IKEA identified the strategic challenges and made attempts to overcome them. One of the
main problems for IKEA was that its prices, considered low in Europe and North
America, were higher than the average in China. Prices of furniture made by local stores
were lower as they had access to cheaper labor and raw materials, and because their design costs were usually nil. 17 IKEA in China International Finance Project Winter 2017
Entering China was also an example of poor execution strategy in terms of pricing.
IKEA has a vision of delivering low cost to its customers. However, IKEA’s prices were
not considered low by the middle-class Chinese customers, IKEA’s main target segment.
Chinese customers’ purchase power was in fact significantly lower than that of their
counterparts in developed countries. IKEA products were, consequently, not affordable to
the vast majority of Chinese customers. Even if a significant portion of Chinese
customers, particularly the younger generations, were attracted by IKEA’s innovative
solutions, symbols of Western lifestyles, they were simply not able to buy them. On the
other hand, the prices were not within the consumption patterns of the Chinese upper
classes that were more inclined to buy foreign products as a symbol of status and not for
their functionality. In such a market, foreign brands were seen as aspirational brands.
Therefore, low prices were the rule for everyday-life products, IKEA’s positioning and
pricing strategy seemed unable to create value to its target group. Furthermore, the IKEA
concept based on the value for money proposition was completely alien to the Chinese
traditional culture. As the Chinese proverb haohuobupianyipianyimeihaohuo (high
quality goods are not cheap, and the cheap goods are not high quality) suggests, in the
Chinese consumers’ view, low prices are often associated to low quality. This cultural
aspect caused resistance to IKEA products mainly among older generations.
The Company realized this and started targeting the young middle-class population.
This category of customers has relatively higher incomes, is better educated and is
more aware of western styles. Targeting this segment helped IKEA project itself as an
aspirational western brand. This was a massive change in strategy, as IKEA was
targeting the mass market in other parts of the world.
In addition, the China expansion came at a cost. Since 1999, IKEA has been working on becoming more .
eco-friendly It has been charging for plastic bags, asking suppliers for
green products, and increasing the use of renewable energy in its stores. All this proved
difficult to implement in China. Price-sensitive Chinese consumers seem to be annoyed
when asked to pay extra for plastic bags and they did not want to bring their own
shopping bags. Also, a majority of suppliers in China did not have the necessary
technologies to provide green products that met IKEA's standards. Helping them adopt 18 IKEA in China International Finance Project Winter 2017
new technologies meant higher cost, which would hurt business. IKEA decided to stick
with low prices to remain in business.
The company also learnt that emerging economies are not ready for environment-
friendly practices, especially if they result in higher prices.
High pressure from competitors’ lower prices coupled with high import tariffs made it
even more difficult for IKEA to decrease significantly its costs. As a consequence, during
the first few year profit in China was poor. Only in 2012 IKEA was finally able to
generate profits in China (Giunta, 2016).
IKEA started to take measures to reduce prices. According to Chinese business review,
IKEA’s China sales rose 35 % in 2003 after lowering prices nearly 10 %. Sales were up
50 % in the first three months of 2004 (Miller, 2004).
To achieve a price decrease of more than 60%, IKEA built a number of factories in China
and increased local sourcing of materials. While globally 30 % of IKEA’s range comes
from China, about 65 % of the volume sales in the country come from local sourcing
(Wei & Zou, 2007). This strategy reduced enormously production costs and resolved the problem of high import taxes.
Table 2.1 Different Types of Commercial Risks and Mitigating Strategies Risk Nature of the risk Mitigation of risks Weak Partner: Supplier
Suppliers decided not to work with IKEA Seeking new suppliers. Operational: shoppers
People enjoy spending their time at the store IKEA decided to accept thi behavior and rarely buy any items behavior as this provided th with positive publicity and the profits picked up. Operational: DIY
DYI concept is not popular in China Offer assembly service to customers Operational: Size of
Size and layout of apartments in China are Adapt furniture size, chang Apartments
different to most international countries. layout. Change product rage as nee
Operational: Stores locations
Store location was crucial for people to be Locate stores where there a able to visit the stores public transportation. 19 IKEA in China