Financial Risks faced by IKEA in China - Tài liệu tham khảo | Đại học Hoa Sen

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