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Financial Risks Faced by IKEA in China
Financial Risks Faced by IKEA in China
Financial Risks Faced by IKEA in China
IKEA IN CHINA
Biggest Market in the World
brand logo...................................................................................................................................5
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REFERENCES.............................................................................................................................56
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List of Figures
List of Tables
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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 Kampradʼs small farm, to opening it’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).
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Over the years IKEA has also changed its brand logo as can be seen in Figure 1.2
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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).
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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).
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
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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
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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).
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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).
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
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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.
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CHAPTER TWO
COMMERCIAL RISKS
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Figure 2.1 Sleeping in IKEA Stores in China (Source: Kevin Frayer/Getty Images)
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In terms of housing, the average square meters per person in China has been increasing
considerably. Until recently, apartments averaged 40 m2; now Beijing and Shanghai
apartments’ average 80 m2. This means several things: Chinese 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).
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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).
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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
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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
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technologies to provide green products that met IKEA's standards. Helping them adopt
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.
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CHAPTER THREE
CURRENCY (FINANCIAL) RISKS
Figure 3.1 Organization Structure of the Inter IKAE group (source: Inter IKEA Group
Annual Report, 2015).
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The non-listed holdings represent 30% of the Group assets under management. Those
assets are invested with a reasonable allocation between North America, Europe and
emerging markets. Investments are made alongside talented entrepreneurs, with the aim
to assist them in building successful businesses. Non-listed holdings are long term
commitments. This strategy is carried through investments in funds, collective investment
schemes or by directly acting in small to medium size companies as a key investment
partner. Skill sets are specific to each investment category.
The remaining Inter IKEA Group assets under management are held as part of the Group
treasury management (bonds, money market funds, deposits, etc.), producing safe, but
modest returns. Non-Euro investments are hedged back to back to the Euro using foreign
exchange swaps (Inter IKEA Group Annual Report, 2015).
IKEA uses economies of scale to encourage suppliers to sell at lower costs. A common
question posed to an IKEA supplier: “What affect would a 10% increase in volume look
like on the purchase agreement price?”(Groh). Through buying in multimillion-euro
quantities, IKEA hopes to receive a better price from its suppliers.
Economies of scale allow raw materials also to be purchased in “bulk” at lower costs,
manufacturing line processes to change less frequently and production lines to run more
hours per day, decreasing down time (McGrath 98).
Another approach IKEA uses when making procurement decisions is to form long-term
relationships with its suppliers. Jim Wetekamp, Senior VP of Solutions
Strategy at Bravo Solutions writes that, “by involving suppliers early, procurement can
accelerate the qualification, design, and contracting processes to shorten the product
release timeline…[and offer] opportunity to shift capital expenditures, manufacturing line
changes, and other production innovation costs to the supplier”(Wetekamp). For IKEA,
this tends to be a spoken agreement between the regional manager from IKEA and the
owner of the production facilities, as opposed to a formal long-term contract (Casino
Royale). IKEA has the advantage of having a great reputation for on-time payments,
large order quantities, and offer overall good publicity to the suppliers, thus few suppliers
would be willing to turn down an order from IKEA, even without a formal long-term
agreement (Groh).
Nonetheless, IKEA holds all of its suppliers- both those with long and short histories
supplying to IKEA- to very high standards. Every IKEA supplier is required to follow the
“IKEA Way” of doing business, or IWAY. IWAY is described as IKEA’s, “Minimum
Requirements for Environment and Social & Working Conditions when Purchasing
Products, Materials and Services” (IKEA Services). IWAY consists of 8 primary “IWAY
Must” requirements that are considered crucial for all suppliers to uphold: no child labor,
no forced and bonded labor, proper business ethics, no severe environmental pollution,
no severe health or safety hazards, transparent working hours, legal minimum wage rate,
and the provision of workers’ accident insurance (IKEA Services). While most of these
requirements appear fundamental to any business, the business environment in which
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IKEA’s largest single purchasing power operates in does not have such minimum
standards. China: the world’s largest producer and supplier of 23% of IKEA’s products
(IKEA Group 31). Moreover, IKEA’s Trade Area Greater China (TAGC) holds 33% of
the group’s purchasing power and is set to grow with the strategic expansion of IKEA
into India slated for 2017 (IKEA Group 4).
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Points - China is the biggest internal market in the world with 1.3 billion potential customers.
- It is a rapidly growing market (usually at least 7% growth per year).
- Even though the situation is changing in certain areas, labour costs remain
comparatively low.
- With the development of the Western provinces (particularly, the Sichuan province),
China offers new opportunities.
Weak China's weak points include:
Points - An ever-changing legal context.
- Bureaucratic and administrative complexities.
- Reports of a lack of transparency, corruption and weak intellectual property rights
protection.
- Cultural differences in business practice may be difficult for foreigners to learn and
apply in new business situations.
- An underdeveloped middle management level and high staff turnover rate, which may
cripple market acquisition.
In China, IKEA said that its move to pay Chinese suppliers in CNY has simplified
negotiations and lowered currency risks in the China market. IKEA used to pay suppliers
in US dollars, “but things are slowly changing.” Paying suppliers with proceeds from
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Chinese sales gives IKEA better visibility into the real cost structure of its suppliers,
making it easier for the retailer to help its suppliers improve productivity, said Rai,
IKEA’s Asia treasury operations chief (Lake, 2012).
For CNY hedging, IKEA predominantly hedge the currency using the offshore market.
As an offshore entity, they are not able to participate in the onshore foreign exchange
market in Mainland China. So far, CNH market in Hong Kong is the most liquid. It has
good accessibility and settlement practices.
According to the Municipal Land Resource and Housing Administration Bureau, IKEA
Chongqing purchased an 86 mu land plot from Jinshan Group in the city’s North New
Area. The land plot (C27-1-1/05), is located next to the No. 210 inner ring road which
connects to the Jiangbei International Airport, and is adjacent to the West Outlets
Shopping Centre. According to IKEA Chongqing, this site will be home to the largest
IKEA home furnishings store in the Asia-Pacific region. The project is expected to begin
construction in June 2012 and open by 2014.
Swedish brand IKEA has decided to invest RMB 1 billion to expand into Qingdao. The
site selection is currently in progress, and the store is expected to open by the end of
2014. At present, IKEA has opened a total of ten locations in China.
By 2013, IKEA became the biggest foreign landowner in China (Song, 2013). It is
difficult to say if the land that IKEA has bought was valued fairly. However, they are
implementing their strategic objectives by the owning the land on which their stores are
built.
Rai the managing director of IKEA Asia Treasury Centre Ltd. says: “For the longer
longer-termed funding requirements, for example, for land purchase or construction, or
where we see it is optimal from an after-tax cost of funding view, that we should repay
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the legacy bank debt. Currency swap with a notional amount of 30 billion yen. At an
operational level, each country runs a local cash pool and borrows from the regional
treasury center when funding requirements arise. For us, our job is all about making sure
the countries’ cash flow forecasts are the most accurate so that funding can be delivered
in an optimal way to meet the business needs. IKEA has never had a liquidity crisis, and
as a key policy the treasury must always maintain a cash buffer to cover all operational
and planned expansion needs. The business people in the countries never need to be
concerned about the financing of an approved commercial project – when they want to
buy a piece of land and build a store, we are on the top of the plan.” (Cited in Lee and
Ho, 2016).
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that China has been able to maintain its inflation rate to manageable levels after 1998, the
year of IKEA’s entry to China, except for 2008 due to the global economic crisis and in
2011 when China joined the WTO.
One third of its franchised fees are earned outside the Euro Zone which
requires translation into its reporting currency - Euro.
The company has associates and subsidiaries outside the Euro Zone,
consolidation of performance results has translations risk implications.
The company has various projects on-going in various countries like China,
USA and so forth which are outside the Euro Zone. Contractual obligations
may require settlement in currencies other than Euros.
Financial Assets and Liabilities held by IKEA may require settlement or be
received in another currency other than Euros.
The protracted economic recessions especially in the Euro Zone poses
economic risk as well.
According to the Inter IKEA annual report the currency risk is being hedged by the
execution of forward exchange contracts, fixing the exchange rates which could be
obtained at certain dates in the future.”
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Several European companies in China have been unable to remit dividends abroad
following the introduction of new exchange controls, the first indication that Chinese
attempts to curb capital outflows are causing problems for foreign businesses. The
measures, which included complex approval procedures for sending money out of the
country, were introduced on 28 November 2016. They appear designed to shore up
China’s foreign exchange reserves following a period of unprecedented outflows of
capital that have sent the Renminbi down almost 6 per cent against the US dollar in 2016,
putting it on track for its worst year on record. China has sold dollars from its foreign
exchange reserves to try to curb downward pressure on the Renminbi, with reserves
hitting $3.12tn at the end of October, the lowest level since March 2011. The new rules
require companies to obtain approval for capital outflows above $5m, such as repayment
of loans or paying dividends, regardless of the currency. Some banks have advised
clients to submit 10-page applications in support of requests to remit funds abroad, they
shall be providing answers within five days (Clover, 2016).
The rapid growth of IKEA in China coupled with their strategy of buying their own
showrooms, require large sums of liquidity. IKEA opened its own treasury centre in
HONG KONG to manage this risk throughout the Far East region as seen in Figure 3.4.
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Figure 3.4 IKEA Asia Treasury Centre (IATC) – cross-border CNY/CNH pool
account operations (Source Lee and HO, 2016)
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CHAPTER FOUR
COUNTRY RISKS
China is among the most attractive locations in the world. It has also grown to become
one of the strongest powers. This rise boosted international business. The legal system
too has been improved. Foreign investors seek business in China mainly because of 3
things. These are: size of the market, the very low cost of labor and China’s growth
potential.
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Shortly after the death of Mao in 1976, the government decided to abandon its Soviet-
style economic policies to adopt free market principles and open up trade with the West.
In 1979, several reforms were launched, including a new Joint Venture law. Starting in
1980, special economic zones were established to attract foreign direct investment (FDI),
economic decision-making was decentralized in several sectors, and citizens were
encouraged to start their own entrepreneurial Venture. With the accession to the World
Trade Organization in 2001, China reached a major milestone that signified its deeper
integration into the world economy
Figure 4.1 Some of the key events during China’s opening up (1978-2003) (Source:
) )هنا نكتب المصدر الذي شاهدنا فيه الرسم و ليس المصدر االصلي للبيانات
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In the 2008-9 World Economic Forum Global Competitiveness Index, China ranked 30 th
out of 131 countries. Whilst this position is above most of the world’s developing
countries, it may nevertheless seem surprising to a western manufacturer accustomed to
being undercut by low-priced Chinese exports. Clearly, in terms of price competitiveness,
Chinese goods are among the most competitive in the world. Foreign investors can also
take advantage of China’s low-cost business environment. However, as China’s
economic development progresses, the demand for resources will inevitably raise the
costs of production and China’s long-term international competitiveness will depend on
the quality of its institutions, infrastructure, and other advanced factors rather than on low
prices. China received its lowest competitiveness scores for technological readiness,
financial market sophistication, and innovation in the 2008-9 ranking, all advanced
factors that will become more important as the country’s economy develops
In March 2011, China’s National People’s Congress approved the 12th Five-Year Plan.
The 12th FYP (2011–2015) contains three broad themes: (1) economic restructuring, (2)
promoting greater social equality, and (3) protecting the environment (S.R. 2015; Xinhua,
2011). Economic restructuring involves collaboration with and learning from foreign
firms, which were welcomed after Deng Xiaoping’s reforms in the early 1990s to instill
competition and share knowledge on market orientation, branding, and world-class
technological quality.
With regards to social equality, the role of policy will be to support equality of
opportunity through increasing the numbers of skilled works and by rising educational
standards. The growing shift to skill-based labor will also increase the pace of innovation
and help China to move up the value chain. At the same time, China’s existing
comparative advantage in low unit labor costs will shrink gradually and enhanced
productivity will rapidly increase the middle-class segment, which in turn, will increase
consumption rates.
Finally, the protection of the environment is a major issue of concern because growth
patterns in the past may have been environmentally unsustainable.
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Doing business in China is influenced both by the legal restrictions and a firm’s risk
appetite. For different sectors, there are opportunities and restrictions (Lehman Brown,
2015; PWC, 2012). Foreign investment in China is currently governed by the “Catalogue
for Guiding Foreign Investment in Industries”.
Another important difference is the Guanxi culture or relationship issue, which also
derives its meaning from Confucianism. The Chinese concept of guanxi is used to
describe the personal relationships and networks that are thought to be necessary when
doing business in China. These relationships often require the exchange of favors,
sometimes involving public officials, and they need to be actively maintained in the long
term if they are to bring significant benefits. There is considerable debate, however, about
the ethics of doing business in this way, the costs of maintaining active relationships, and
the relative benefits of guanxi as opposed to having good products and a good marketing
strategy.
Further, there is mianzi, which means never losing face, and is a very important issue in
China. From a social-psychological point of view, it refers to an individual’s value in the
eyes of others, or the kind of prestige or reputation achieved through getting on in life
through success and ostentation.
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Chinese culture has a large difference between people’s social status which reflects high
power distance culture. Mooij (1997) shows that status symbols are important in China.
Approaching target customer in an indirect way would be the right way since culture of
collectivism, family and belonging are strong in China. (ibid). Having high power
distance demonstrates some kind of social habits (ibid). Feminine values are not
dominant culture in China (Capdevielle, Li & Nogal, 2007)
What often makes it difficult to understand Chinese culture is that it is in a constant state
of flux. It is anchored in traditional values and torn towards modern ones; inspired by
relationship, harmony, family and attracted by entrepreneurial achievement and well-
being. Integrating elements of Western values is vital for the modern Chinese value
system, but preserving traditional Chinese values, such as harmony and cooperation, will
extensively reflect China’s policy and future success. In fact, China does not adapt to
modernity, but uses it as it has always done in the past, as a tool to serve its own purpose
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. China’s low
labor cost, growing consumer market and sharply declining import tariff rates attracted a
number of foreign furniture companies.
Chinese furniture industry consists of around 50,000 companies and 5 million employees
(Cao et al., 2004). Most of these companies are small- to medium-sized operations with
annual sales less than $36 million or CNY ¥ 300 million (Hu, 2003). Large-size
companies only account for 3 % of the total industry (Cao et al., 2004). China became not
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only a world-class location for setting up furniture factories and an important export base
but also a promising market for global furnishing companies. 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.
One of the major benefits of the joint venture was the risk mitigation for IKEA. Entering
into the Chinese market came with many uncertainties, and the entering into the joint
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venture was less risky than if they had entered on their own. It also allowed IKEA to get
over trade barriers and fulfill legal requirements of market entry. The partner they chose,
also had strong affiliations to the Swedish Chamber of commerce in China, who could
provide both partners vast amounts of information regarding the Chinese marketplace.
However a joint venture prevented IKEA from maximizing its expansion and also led to
compromise in their store design, as it wasn’t until IKEA had full control in that the first
“real” IKEA store was redesigned and built in Shanghai.
After a while, polices began to loosen, allowing foreign companies more freedom in the
Chinese market. After China joined the WTO, foreign firms could build wholly owned
stores. IKEA then changed its entry mode by purchasing the remaining shares from their
partners and began building wholly owned stores and gained ownership of their
previously built stores. This allowed IKEA to continue its expansion plans in China and
fully control store operations.
In 1998, when IKEA entered China, China ranked No. 52/85 in the CORRUPTION
PERCEPTIONS INDEX. Today China is 79/176 in the index (Transparancy.org, 2016).
Since 2013 the government has led a sustained anti-corruption campaign, seeking to root
out vested interests and strengthen the Chinese authorities’ power, paving the way for
further future reforms. A number of high-level officials have been charged with
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corruption and expelled from the Party, including former security chief, Zhou Yongkang
(GOV.UK, 2016). Therefore the country seems to be combating corruption effectively.
China has enacted extensive anti-bribery legislation. For serious cases this allows for up
to life imprisonment for offering bribes, receiving bribes can, in some cases, attract the
death penalty (Transparancy.org, 2016).
IKEA seems to have managed this risk well and continues with its operations in China.
This is in contrast to the halting of Russian expansion due to corruption in 2011 (Ditter,
2011).
In China many of IKEA designs were copied and sold at a much lower price. Sometimes,
imitators tell their customers flat-out that they can copy any item from the IKEA
catalogue. Some pirates have even built shops that copy IKEA stores (Figure 4.3).
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Figure 4.3 “11 Furniture” – is one of the most notorious IKEA imitators. Yellow and
blue company colors (Source: Kornienko, 2016)
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this way over the previous two years increased from 33% to 43% since a similar survey
was conducted in 2010, while similar perceptions regarding the outlook for the next two
years also increased from 36% to 46% at the same time. The European Chamber of
Commerce survey showed that the five most significant regulatory obstacles were, in
order of the percentage of respondents: discretionary enforcement of broadly drafted laws
and regulations (42%); lack of co-ordination of different regulators (40%); lack of
harmonization with global standards (39%); registration procedures for companies or for
products (38%); and local implementation of Chinese standards (35%). More specific
concerns were voiced in the 2010 European Chamber survey that China was not living up
to its 2001 WTO accession commitments. Only one-fifth of respondents considered that
the Chinese government was implementing changes in the spirit of the WTO agreement
(Davies, 2013).
The Chinese government has stated it welcomes foreign investment. In 2015, China’s
inward FDI flow rose around six percent from the year earlier to USD 126.3 billion,
according to the Ministry of Commerce (MOFCOM). China’s sustained high economic
growth rate and the expansion of its domestic market help explain its attractiveness as an
FDI destination. Foreign investors, however, often temper their optimism regarding
potential investment returns with uncertainty about China’s willingness to offer a level
playing field with domestic competitors. In addition, foreign investors report a range of
challenges related to China’s current investment climate. These include industrial policies
that protect and promote state-owned and other domestic firms, equity caps and other
restrictions on foreign ownership in many industries, weak IPR protection, a lack of
transparency, corruption, discriminatory and non-transparent anti-monopoly enforcement,
excessive national or cyber security requirements, and an unreliable legal system. The
2015 Anti-Terrorism Law, the draft Foreign Non-Governmental Organizations (NGO)
Law, and the measures restricting bank purchases of foreign technology raised concerns
that China was back-tracking on reforms to further open to foreign investment
(Investment Climate Statement, 2016).
In April 2015, Chinese National Development & Reform Commission (NDRC) and the
Ministry of Commerce (MOFCOM) co-published a new industrial guide for foreign
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investment (Catalogue of Industries for Foreign Direct Investment 2015, which has
repealed the 2011 version and established some new rules for different sectors of foreign
industries. Generally speaking, foreign industries in China can be sorted into four
categories: the “encouraged”, the “restricted”, the ”prohibited” and by implication the so-
called “permitted” (Industries that are not included in the catalogue).Compared to the
2011 version of the Foreign Direct Investment Policy, China is getting more and more
investor-friendly and is creating a more competitive environment for foreign companies.
However, European investors should still keep in mind that their business plan should
be in accordance with the above-mentioned industry catalogue and make sure that
their industries are not prohibited by Chinese government. It is suggested that investors
should make a detailed business plan before deciding to set up in China (Liao, 2015).
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Figure 4.4 Demonstration of the Danger of IKEA furniture unit (Source: The
Guardian, 2016).
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CHAPTER FIVE
CROSS CULTURAL RISKS
5.1 Introduction to the Chinese Culture
In the Seven Habits of Highly effective people the 5th Habit was” to seek first to
understand & then to be understood “ as working on a global scale with multi –faceted
initiatives requires understanding very well how to communicate, understand different
cultures to manage to enter successfully.
The cultural hazards that exist when acquiring a company in another country are
compounded when a different language is involved.
There is a need to explore the cultural issues in China from a range of theoretical and
practical perspectives. A relatively deep understanding of differences from the West
should bring benefits unavailable through action based on myths and stereotypes.
Understanding the different philosophy between the Eastern Culture & the Western
Culture is very important. “When differences are perceived among cultures, emotional
defensive reactions and misunderstandings emerge from the confrontation of opposing
collective points of view” (Casas, 1993).
Western philosophy, and business, has been based largely on analysis and logic – so
called left brain activity, on the other side, conservative values associated with life in
China may be associated with the continuing influence of Confucianism. With its stress
on virtue and study a legacy of Confucianism could point to a more cultured and
thoughtful approach in China, including approach to EHS. Note that he advocated a
balance between study and reflection. China is still influenced by early Chinese
philosophers; it is worth being aware of the basic principle of the Tao. As a gross
simplification, the Tao links everything, including thought, into a unified system. More
helpfully for understanding why this may be important,
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Where Westerners tend to look for clear alternatives (option A versus option B), Chinese
managers may examine ways to combine both option A and option B. This more holistic
thinking can cause misunderstanding and, because it may take longer, it could create a
false impression that colleagues in China are less decisive
The Influence of MAO ZEDONG the revolutionary leader in the Chinese people is
confounding Factor, still his pictures (Figure 5.1) are found in the banknotes, streets,
restaurants & even at homes.
Chinese Learning Center suggests that Mao Zedong’s thoughts on discipline, published in
1966, provide a valuable insight into structures which persist in many Chinese
organizations. According to Chairman Mao, “The individual is subordinate to the
organization. The minority is subordinate to the majority. The lower level is subordinate
to the higher level.” China was governed in this way for over 20 years. The legacy is that
Chinese society and companies tend to organized hierarchically, group oriented rather
than individualistic and more ready to follow instructions.
The risk is the differences in perceiving the different culture, risk here is that individuals
may be less likely to challenge practices if this could be seen as disrespectful,
indiscipline, to more senior or corporate managers.
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Mandarin is the most common, there are several other regional languages such as Wu,
Min and Cantonese , all, it is said, mutually unintelligible. Add to that different scripts
(simplified and traditional) and a different culture – translation is not straightforward.
Currently, unlike the English alphabet, Chinese characters are based on stylized pictures
of objects (pictographs). Additional symbols may be added to create more complex ideas
(ideographs) and sounds (phonetic or harmonic writing). Root characters (radicals) are
used as building blocks either alone or in combination). Consider then the modal way that
characters are laid out on the page (as if in invisible squares, evenly spaced), and the high
regard for calligraphy as an art form. It all supports the theory of a more holistic way of
approaching topics in China.
In order to overcome language and culture barrier, IKEA had to translate their name to a
Chinese phrase in order to connect to the collectivist culture of China. The IKEA’s
Chinese name consists of two characters which means comfortable home and therefore
represents their product and corporate identity. (Chaletanone and Cheancharadpong,
2008).
IKEA, the huge Western corporation, with the long experience of process and an
outstanding health, safety and environmental record in its own country, when entering
China, knew that the process of safety will not necessarily be replicated as it is in
Sweden. That does not mean it cannot be done, or even that it has to be difficult. But it
does require an appreciation that the same approach will not necessarily suit all cultures
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especially with the reluctant culture of China. Having the right motive or aim is not
enough – however worthy.
To overcome this cultural difference, IKEA from the very beginning paid attention to
selecting the right team to send to China. They considered the cultural relationship which
may play an important role in recruiting, attracting and training people in China. They
hired a lot of people in Sweden with Chinese connections. So for example when you had
Chinese parents but you were born in Sweden, you knew Chinese well etc. So they hired
people with Chinese experience in 1998. For special tasks they rely on experienced
managers. For example, the expansion manager in China had more than 30 years of
IKEA experience and he has been working in France, Austria, Arabia, all the Eastern
European countries, Poland, Czechoslovakia, all over for 30 years expanding IKEA.
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Table 5.1 Culture differences between China and Sweden (Source: Trompenaars,
1998 , cited in Li, 2011)
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On the other hand, IKEA put a lot of effort into training the Chinese employees.
Customer service is of great importance in terms of training for employees in IKEA,
however the company also sets value on informing people about the company’s culture,
tradition, history and common practices all over the world, IKEA promotes a culture of
both empowerment and encouraging entry-level employees to be vocal about suggestions
for store improvements and to exert their own decision-making skills on the sales floor
(Karcz, Liu and Adamska, 2006).
Negotiations in China are never final (Zhang, 2008). The Chinese use negotiations as a
way to build relationships over long extended periods of time. The signing of a contract
in China signifies the beginning of a long term relationship with the Chinese. The
Chinese believe that their customs are far more important than any written piece of paper.
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A contract starts a long-term commitment and they assume that it will be revisited every
now and then (Zhang, 2008).
Chinese workers are reluctant to take responsibilities, they have tendency to cover up for
each other. They will work for benefits of groups they are in, not for their own interests
only. This is a new point for IKEA when we entered to Chinese market. IKEA’s culture
encourages people dare to take responsibilities. Therefore, it is not easy for Chinese
employees to change their current habit to adapt to the IKEA’s way. (Binh and Hongyu,
2008).
Normally, new comers will be provided orientation and have a mentor to introduce about
the company’s cultures and expectations of the company. IKEA’s culture is delivered to
Chinese workers by managers who play the role as missionaries. Therefore, IKEA offers
them training programs such as “Leadership program”. They discuss IKEA background,
developments, needs, where they want to be, and how could they get there. Other issues
such as the company’s values and how they can be addressed, how could a worker live
with it and even challenge it ( Binh and Hongyu, 2008).
IKEA uses proactive risk assessments to ensure product safety by evaluating, detecting
and eliminating potential hazards in order to ensure sustainability.
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IKEA strives to minimize all negative impact on environment & welcoming legislation
against handling of illegally logged wood. More and more governments are legislating
against the handling and illegal trading of illegally logged wood – the US, EU,
Switzerland and Australia have already implemented or are developing legislations.
IKEA are designing efficient control systems in place to ensure the legality of the wood
use for more than a decade. They are members of the “Timber Retail Coalition” in the
EU and the “Forest Legality Alliance” in the US. In Australia, IKEA and Greenpeace
were two of the signatories of the Common Platform, requesting the Australian
government to legislate against illegal logging.
IKEA is engaged in a number of projects together with WWF to address the challenges of
illegal logging and unsustainable forest management in Russia and China, which are two
of their most important wood sourcing countries. Choosing to concentrate most of their
own resources, they dedicated two-thirds forestry specialists to the area. Some of these
specialists focus entirely on cross-border trade as approximately one-third of the wood
IKEA suppliers source in Russia is processed in China.
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sophisticated & considered a Risk, . This is probably one of the most contentious and
misunderstood issues. Extraordinary levels of government bureaucracy reside in different
parts of China. That in itself is tough enough but, when someone translates the protocols,
key pieces of information may be omitted.
To mitigate this risk, it is essential to get to know the local government officials to build
trust and understand the local issues. One should work with them. Live in china for a
while to know how to meet the needs of local communities.
Also faced with rising costs, some of the IKEA’s suppliers in China decided not to
continue working with IKEA. Instead they turned their attention to selling copies of the
furniture they used to manufacture for IKEA online at T-mall, one of the biggest e-
commerce platforms in China. This is an unethical situation. However, the mangers of
IKEA are sure of their customers loyalty (ANON-2, 2013).
Table 5.2 Different Types of Cross Cultural Risks and Mitigation Strategies
Risk Nature of the risk Mitigation of risks
Cultural differences: Customers would not understand the IKEA translated their name into a Chine
language barrier meaning of the brand name and phrase meaning comfortable and family.
hence will not identify with it
Cultural differences: Building trust and lengthy IKEA provided cultural training for
Negotiation patterns negotiations are the norm in China managers based on the research
regarding Chinese personalities
Cultural differences: Chinese workers are not risk takers IKEA provided training for its
Decision making styles and innovators as they are afraid to workers in China to teach them IKEA
loose face company culture.
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Cultural differences: Different aspects in the culture Training for IKEA managers before
personality affect the personality of the people going to China.
in that culture. Support for managers as they arrive
China.
Training for Chinese employees to
work with foreign IKEA managers.
Cultural difference: These are applied worldwide by dedicate two-thirds forestry specialis
Proactive Health and IKEA, but they were difficult to to the area as most wood is logged in
Safety Measures introduce in China Russia and processed in China
Cultural difference: Different environmental, health and Get to know the local government
Regulations safety regulations in different parts officials to build trust and understand
of China. Translation problems the local issues.
arise and some important info is lost.
Cultural difference: Former IKEA suppliers producing IKEA ignored this and claim they ar
Ethical practices copies of IKEA’s furniture and sure of their customer loyalty.
selling it online
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