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The low-price strategy is the key to Ikea’s development in China. It plans to decrease the average price of its products by 2%-3% year on year. In the past eight years, Ikea successfully lowered all of its products’ prices by 20%. In its 2011 financial year, the average price of its products dropped 2.6%.
But not everyone applauds for the decreasing price. Song Shihou, board chairman of Suihua, Heilongjiang-based Qing’an Houcheng Wooden Products Co., Ltd (Houcheng Wooden), said: “They lowered the price of the products they sold based on squeezing our profits. Producing products for Ikea is not profitable at all.”
Cao Yuewei, board chairman of Heilongjiang-based Naili Wooden Products Group (Naili Wooden), said: “60% of Ikea’s curtains were produced by us. They bought the products at about 50 yuan per square meter but sold them with 260 yuan per square meter.”
Both Houcheng Wooden and Naili Wooden are among the tens of Ikea’s old OEMs which ended their cooperation with Ikea due to the dissatisfaction with the inequality. Together they founded a company similar to Ikea – the Jiayimei Home Improvement Co., Ltd, which is expanding itself in a low profile.
The Low-price Products
Cao Yuewei used to be the president of the League of Ikea’s Suppliers. His Naili Wooden was one of the first OEMs for Ikea in China.
Naili Wooden signed a contract with Ikea in 2006, according to which the Swedish company helped Naili Wooden to build a plant with the annual output of 50 million US dollars. At that time Ikea announced that it will give enough orders to make full use of such a big production capacity.
A senior analyst in the furniture industry said that Ikea usually provides low-interest credit loans for its partners to solve their problems of capital flow on condition that they can provide products at low prices.
The aforementioned plan of Naili Wooden was put into use in 2007. However, the production cost was high according to Ikea’s requirements in quality and prices. Cao Yuewei said:“Actually, Ikea treated many OEMs in China in that way. Those that cannot endure the cost went down naturally.”
Fortunately, Naili Wooden only put 40% of its production capacity into producing things for Ikea. With the support of other business, it has time to change its production structure to survive the crisis.
But Houcheng Wooden is not that lucky. In the past 13 years, it never got rid of the role as the manufacturer for producing various kinds of furniture for Ikea. Song Shihou said: “From last December, Ikea stopped providing orders and loans for us in the name of quality problems.”
Ikea once lent Houcheng Wooden loans of 600 thousand US dollars to buy raw materials and upgrade devices. It required Houcheng Wooden to provide products based on orders, and it deducted 40 thousand US dollars every month as the repay for the loans and interest. However, in January 2012, Ikea deducted the sum of money half of a month before the usual date and did not pay the rest of money that Naili Wooden deserved. “This generated problems for us to pay our employees’ salary before the Spring Festival.”
What’s beyond Song Shihou is that Ikea accused Naili Wooden’s products of “having quality problems in the form of glue lines and big wood knots, which might cause slight damages” before claiming compensation. “We have been producing step stools for Ikea for 13 years and never encountered quality problems. Now our products are still sold on the shelf of Ikea,”said Song Shihou. The two companies still cannot reach an agreement after several rounds of negotiations.
Max He, who once worked in the purchasing department of Ikea for 7 years, said that the quality tests of Ikea’s products in China was made by a third-party institution called SGS. The fees of tests were afforded by its Chinese suppliers but the standards were provided by Ikea. “Many suppliers are not pleased with the unfair testing method.”
The Low Profits
Though Ikea follows the low-price strategy, many of its suppliers in China believe that Ikea’s products are still very lucrative.
Therefore, Naili Wooden, which has been working for Ikea for 16 years, terminated the contract of supplying products for Ikea at the beginning of 2011. It was preceded or followed by tens of Ikea’s OEMs.
According to an anonymous factory director, on the second day after the implementation of tax rebate policy for export-oriented enterprises, we were told by Ikea’s purchasing department that the prices of our products should be further lowered due to the tax rebate.
“We put over 90% of our production capacity into the service for Ikea, but our profit margin is less than 5%, even though the tax rebate is included,” Song Shihou said.
Zhejiang-based Xilimen Furniture Co., Ltd is a typical case. In 2002, it won the qualification as a supplier for Ikea after bidding. It was appointed the only mattress supplier for Ikea in the Asian-Pacific Area. At this moment, Ikea is the biggest client for this company. From 2009 to 2011, the company’s annual operating revenue from the deal with Ikea was respectively 240.45 million, 238.71 million and 284.37 million yuan, accounting for 39.92%, 25.63% and 33.93% of the company’s total revenue. Meanwhile, the company’s total revenue was 602.28 million, 670.07 million and 838.24 million yuan with a huge annual increase. However, the net profits in these three years amounted to 70.38 million, 80.56 million and 87.87 million yuan, showing that the profits did not increase as much as the revenue.
According to the data, the furniture manu- facturers in China which act as Ikea’s OEMs could only enjoy the profit margin around 5%, while those ordinary companies can have the profit margin ranging from 15% to 40%.
“Fly-off” of OEMs
A researcher of the furniture industry said that most OEMs for Ikea want fame instead of fortune. “Working as an OEM for wellestablished foreign companies usually poses high requirements for ourselves in management, quality and so on. It could improve the company’s brand awareness like the halo effect. However, the increasing production cost made the survival extremely difficult for those profitless companies,” said Song Shihou.
In order to change this situation, Cao Yuewei united with tens of previous OEMs of Ikea to found the Jiayimei Home Improvement Co., Ltd, which is Ikea’s Chinese counterpart. Most of the Jiayimei’s products are similar to Ikea’s in style, design and price.
Song Shihou also said that Houcheng Wooden established a new brand sharing the similar style with Ikea’s products.
“It is not a permanent method to rely on cheap labor force and producing things for others. It is necessary for us to make and develop our own brands,” said Cao Yuewei. Those OEMs are hard to make their own voices when being treated unequally by foreign companies.
In Ikea’s press conference for the 2012-2013 financial year, Ren Guowei, vice president of retailing at Ikea China, said that 25% of Ikea’s products in China were made by its Chinese partners. It has recruited 350 local suppliers in China. With such a great number, even though some of OEMs have quitted, this will not affect Ikea’s sale and development in China.
But not everyone applauds for the decreasing price. Song Shihou, board chairman of Suihua, Heilongjiang-based Qing’an Houcheng Wooden Products Co., Ltd (Houcheng Wooden), said: “They lowered the price of the products they sold based on squeezing our profits. Producing products for Ikea is not profitable at all.”
Cao Yuewei, board chairman of Heilongjiang-based Naili Wooden Products Group (Naili Wooden), said: “60% of Ikea’s curtains were produced by us. They bought the products at about 50 yuan per square meter but sold them with 260 yuan per square meter.”
Both Houcheng Wooden and Naili Wooden are among the tens of Ikea’s old OEMs which ended their cooperation with Ikea due to the dissatisfaction with the inequality. Together they founded a company similar to Ikea – the Jiayimei Home Improvement Co., Ltd, which is expanding itself in a low profile.
The Low-price Products
Cao Yuewei used to be the president of the League of Ikea’s Suppliers. His Naili Wooden was one of the first OEMs for Ikea in China.
Naili Wooden signed a contract with Ikea in 2006, according to which the Swedish company helped Naili Wooden to build a plant with the annual output of 50 million US dollars. At that time Ikea announced that it will give enough orders to make full use of such a big production capacity.
A senior analyst in the furniture industry said that Ikea usually provides low-interest credit loans for its partners to solve their problems of capital flow on condition that they can provide products at low prices.
The aforementioned plan of Naili Wooden was put into use in 2007. However, the production cost was high according to Ikea’s requirements in quality and prices. Cao Yuewei said:“Actually, Ikea treated many OEMs in China in that way. Those that cannot endure the cost went down naturally.”
Fortunately, Naili Wooden only put 40% of its production capacity into producing things for Ikea. With the support of other business, it has time to change its production structure to survive the crisis.
But Houcheng Wooden is not that lucky. In the past 13 years, it never got rid of the role as the manufacturer for producing various kinds of furniture for Ikea. Song Shihou said: “From last December, Ikea stopped providing orders and loans for us in the name of quality problems.”
Ikea once lent Houcheng Wooden loans of 600 thousand US dollars to buy raw materials and upgrade devices. It required Houcheng Wooden to provide products based on orders, and it deducted 40 thousand US dollars every month as the repay for the loans and interest. However, in January 2012, Ikea deducted the sum of money half of a month before the usual date and did not pay the rest of money that Naili Wooden deserved. “This generated problems for us to pay our employees’ salary before the Spring Festival.”
What’s beyond Song Shihou is that Ikea accused Naili Wooden’s products of “having quality problems in the form of glue lines and big wood knots, which might cause slight damages” before claiming compensation. “We have been producing step stools for Ikea for 13 years and never encountered quality problems. Now our products are still sold on the shelf of Ikea,”said Song Shihou. The two companies still cannot reach an agreement after several rounds of negotiations.
Max He, who once worked in the purchasing department of Ikea for 7 years, said that the quality tests of Ikea’s products in China was made by a third-party institution called SGS. The fees of tests were afforded by its Chinese suppliers but the standards were provided by Ikea. “Many suppliers are not pleased with the unfair testing method.”
The Low Profits
Though Ikea follows the low-price strategy, many of its suppliers in China believe that Ikea’s products are still very lucrative.
Therefore, Naili Wooden, which has been working for Ikea for 16 years, terminated the contract of supplying products for Ikea at the beginning of 2011. It was preceded or followed by tens of Ikea’s OEMs.
According to an anonymous factory director, on the second day after the implementation of tax rebate policy for export-oriented enterprises, we were told by Ikea’s purchasing department that the prices of our products should be further lowered due to the tax rebate.
“We put over 90% of our production capacity into the service for Ikea, but our profit margin is less than 5%, even though the tax rebate is included,” Song Shihou said.
Zhejiang-based Xilimen Furniture Co., Ltd is a typical case. In 2002, it won the qualification as a supplier for Ikea after bidding. It was appointed the only mattress supplier for Ikea in the Asian-Pacific Area. At this moment, Ikea is the biggest client for this company. From 2009 to 2011, the company’s annual operating revenue from the deal with Ikea was respectively 240.45 million, 238.71 million and 284.37 million yuan, accounting for 39.92%, 25.63% and 33.93% of the company’s total revenue. Meanwhile, the company’s total revenue was 602.28 million, 670.07 million and 838.24 million yuan with a huge annual increase. However, the net profits in these three years amounted to 70.38 million, 80.56 million and 87.87 million yuan, showing that the profits did not increase as much as the revenue.
According to the data, the furniture manu- facturers in China which act as Ikea’s OEMs could only enjoy the profit margin around 5%, while those ordinary companies can have the profit margin ranging from 15% to 40%.
“Fly-off” of OEMs
A researcher of the furniture industry said that most OEMs for Ikea want fame instead of fortune. “Working as an OEM for wellestablished foreign companies usually poses high requirements for ourselves in management, quality and so on. It could improve the company’s brand awareness like the halo effect. However, the increasing production cost made the survival extremely difficult for those profitless companies,” said Song Shihou.
In order to change this situation, Cao Yuewei united with tens of previous OEMs of Ikea to found the Jiayimei Home Improvement Co., Ltd, which is Ikea’s Chinese counterpart. Most of the Jiayimei’s products are similar to Ikea’s in style, design and price.
Song Shihou also said that Houcheng Wooden established a new brand sharing the similar style with Ikea’s products.
“It is not a permanent method to rely on cheap labor force and producing things for others. It is necessary for us to make and develop our own brands,” said Cao Yuewei. Those OEMs are hard to make their own voices when being treated unequally by foreign companies.
In Ikea’s press conference for the 2012-2013 financial year, Ren Guowei, vice president of retailing at Ikea China, said that 25% of Ikea’s products in China were made by its Chinese partners. It has recruited 350 local suppliers in China. With such a great number, even though some of OEMs have quitted, this will not affect Ikea’s sale and development in China.