An IKEA store which opened in Wuxi, Jiangsu province in June. (Photo/Xinhua)
Low pricing has been IKEA's main strategy to survive in the China market, creating tension between the Swedish home products company and its Chinese suppliers over continuous squeezed margins, reports Shanghai's First Financial Daily.
IKEA has successfully lowered product prices by more than 20% over the past eight years based on its plan to decrease prices 2%-3% on average every year. Last year, the prices of its products dropped 2.6% on average.
The low-price policy has been well-received by customers but not, understandably, by its local suppliers. "We cannot make any money from being their contract manufacturer," Song Shihou, chairman of Houcheng Wood in Heilongjiang province in China's northeast, was quoted by the newspaper as saying.
Heilongjiang Naili Wood has produced 60% of IKEA's curtains in the global market. "They bought from us at about 50 yuan (US$8) per square meter, then sold them at more than 260 yuan (US$41) to the customers," Naili chairman Cao Yuewei told the newspaper.
Since the beginning of last year, more than 10 Chinese suppliers including Houcheng and Naili have broken off their partnership with the world's largest furniture retailer due to the disproportionate prices, quietly preparing to create a new brand of home goods retail chain called Jiayimei, which would cheekily incorporate the two Chinese characters that make up IKEA's name in Chinese.
IKEA usually offers low-interest loans for its suppliers to solve their capital problems, but the prerequisite is that the suppliers have to offer a low price. Many suppliers built factories via the cooperation model but could not cover their production costs later due to the low price and high quality standards set by the Swedish company.
A former IKEA employee told the newspaper that IKEA hired a third party to conduct quality tests. The tests were paid for by the suppliers but the standards were set by IKEA, which became another source of complaint.
One anonymous company who supplied IKEA said the company asked the suppliers to lower their prices a day after Beijing announced a tax rebate policy on exporters in 2010. "Our profits were less than 5% of the costs after the tax rebate," Houcheng's Song Shihou was quoted by the newspaper as saying.
More than 25% of IKEA's products in China are locally sourced, which means the company works with more than 350 local suppliers, Ren Weiguo, vice president for the retail business of IKEA China, told at a briefing for the 2012/2013 financial year.
Houcheng Wood 厚成木業
Heilongjiang Naili Wood 耐力木業
Ren Weiguo 任偉國