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RISKS FACED BY IKEA IN

CHINA
Global Risk Management

Report by,

KRISHNA LAST NAME UNKNOWN


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. 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. 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.

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.

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

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. All stores have a restaurant with essentially
the same 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. A typical journey in a store is seen in Figure 1.3.
Figure 1.3 Typical Shopper’s Path in an IKEA Store

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.

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. At this point, location advantage highly influences the
expansion of IKEA to China.

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 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 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.

Also, this strategy minimizes financial risk and enables IKEA to handle with distant market.
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.

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.

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 cities of China from 2004,
they adopted the same strategy of buying land and built their own stores.

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.

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.
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.

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. However, IKEA store managers have not been
too upset about this. This behavior is illustrated in Figures 2.1 and 2.2.

Figure 2.1 Sleeping in IKEA Stores in China


Figure 2.2 Sleeping in IKEA Stores in China

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.

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).

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.
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.

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 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.

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.

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.
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.
2.5 Poor Execution Strategy

Figure 2.3 Change in the Operations of IKEA in China to suit the market

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.
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 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.

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.

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. This strategy reduced
enormously production costs and resolved the problem of high import taxes.

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 this
behavior and rarely buy any items behavior as this provided them with
positive publicity and slowly 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, change store
Apartments different to most international countries. layout.

Change product rage as needed

Operational: Stores locations Store location was crucial for people to be Locate stores where there are
able to visit the stores public transportation.

Commercial Risk: Time of IKEA missed the start of the high demand on They worked hard on their
entry furniture by coming late to the Chinese marketing and positioning
market. strategies.
Commercial Risk: Already in China there were several local and Price reduction by up to 60%.
Competitive Intensity international firms selling furniture at prices
lower than IKEA initially offered

Commercial Risk: Poor  Price too high for middle class young Reducing prices to become
Execution strategy leading to generation. affordable to its target young
low profits  Price considered cheap by older wealthy generation group. Since 2000,
generation who expected imported IKEA has cut its prices by more
products to be expensive. than 60 %.
 Competitors selling products at lower
prices.
Local factories and local sourcing
to reduce import tax and hence
reduce costs.
CHAPTER THREE
CURRENCY (FINANCIAL) RISKS

3.1 The Finance Strategy of IKEA


The organizational structure to which IKEA is belongs can be seen in Figure 3.1. IKEA has a
strong finance department. The Finance Department supports the Inter IKEA Group goal of
achieving financial independence through long term investments. The division is built around
three core areas:

• Non listed holdings in funds, co-investments and direct investments


• Fund management
• Treasury management
Each of the above parts of the Finance Division is managed by separate teams with special skill
sets and an organization of its own. (Inter IKEA Group Annual Report, 2015). Strategic
investments in Vastint Group (the Property Division of IKEA), as well as investments
performed by the Finance Division, aim to ensure financial stability and create long term value.

Figure 3.1 Organization Structure of the Inter IKEA group

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’s group treasury function is centralized in Europe in two principal offices, in Brussels
and Dublin. The group treasury’s function is to manage all of the group’s financial risk and to
perform as an internal bank for all the operating companies. Recently they launched a new
regional treasury centre in Hong Kong . An integrated group treasury function centralizes all
the treasury functions, including centralized financial risk management (liquidity, currency,
interest rate & credit risk), funding, capital structure management, netting & payments.

3.2 Purchase Strategy


For some Companies, managing the value chain is a small operation, with few choices of
suppliers and limited distribution channels. However, as company go global it expands
operations and it enlarges customers network, this chain becomes a complex web of
relationships built, opportunities taken, strategic moves made, and alliances formed. For IKEA,
a global retailer providing furniture and home accessories, the later is the case. With 1,046
manufacturers in 52 countries supplying to 345 stores in 45 counties, IKEA Group is tasked
with managing and developing these key links in the value chain. The IKEA purchasing
strategy is designed to keep costs low, allowing the firm to be a cost competitor. IKEA Group
employs economies of scale, direct delivery to stores and long-term strategic relationships with
suppliers as a part of their low-cost purchasing strategy.

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?” 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.

Another approach IKEA uses when making procurement decisions is to form long-term
relationships with its suppliers.

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”. 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.

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

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. 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.
Strong and weak points of Chinese Market

Strong China's strong points include:


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.

Different Types of Financial Risks and Mitigating Strategies

Risk Nature of the risk Mitigation of risks

Financial: Currency Exposure Currency Risk Payment in Yuan from the


proceeds of sales in China to the
Chinese suppliers to mitigate
currency risk

Financial: Asset Valuation IKEA’s strategy is built its stores on IKEA has accepted this risk to
100% owned land. Now they are the continue to in implementing its
biggest foreign land owner in China. strategy.
Was their land purchased at a fair price?
Financial: Foreign Taxation Taxes were high when IKEA first came There are still, but they are much
to China. There are tariffs on imported less than before. IKEA accepted
goods, VAT, Corporate income tax and this risk from the start because of
personal income tax for foreigners the huge investment potential in
working in China. China.

Financial: Inflationary and Cannot change the price of products for  Currency flows are hedged on
Transfer Pricing a year once the catalogue is printed a yearly basis; so there is no
regardless of inflation foreign exchange risk for this
activity.
 Luckily the inflation rate is
small in China
Financial: Foreign Exchange Different risks: translation, transaction  Hedging tools for currency
Risks and operation exchange risks.

In November 2016, the government in


China issued new guidelines on
transferring money out of the country by
foreign firms.

Financial: Liquidity Risk The need for high liquidity to finance Use the treasury centre in HONG
rapid expansion KONG to manage these risks.
CHAPTER FOUR

COUNTRY RISKS

4.1 The Chinese Market: Huge Potential and High Risk


Due to the increased purchase power of Chinese consumers and the growing popularity of
Western values, demand for high-end Western products IKEA in China: A “Global” Marketing
Strategy soared. It is estimated that China currently has approximately 30 million middleclass
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. 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 .
Most of these companies are small- to medium-sized operations with annual sales less than $36
million or CNY ¥ 300 million. Large-size companies only account for 3 % of the total industry.
China became not 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.

Examples of encouraged, restricted and prohibited industries in China


4.2 Country Risks that faced IKEA in China
4.2.1 Government Intervention, Protectionism and Barriers to Trade and Investment
The biggest difficulty for IKEA when entering China was the legal systems and trade barriers.
Initially IKEA’s presence in the Chinese market was purely procurement, with most of its
purchases of materials from other store deriving from China. In 1998 IKEA then went on to
establish itself in the Chinese retail area, when it opened its first retail store in Shanghai. The
store was opened as part of a joint venture with Beijing Northern Sweden Limited Company,
as policies at the time did not allow for foreign companies to build wholly owned stores.

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 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.

4.2.2 Bureaucracy, Red Tape, Administrative Delays and Corruption


It has been reported that there still remains some regulatory challenges which restrain foreign
retail expansion In China. While many of these elements are not strictly speaking in conflict
with China’s WTO commitments, they are often not implemented transparently and involving
excessive red tape for foreign retailers. These include limits on total store outlets a foreign
majority owned company can open up, limits on store size, and limits on the sale of certain
products. Even though local authorities can now authorize the opening of new stores, some
provisions stipulate that central-level approval must still be sought after certain thresholds have
been surpassed (e.g. number of stores in China). A number of other non-regulatory obstacles
also exist, such as difficulties in obtaining land-use rights, and a lack of transparency,
particularly in sub-sectors such as media.

In 1998, when IKEA entered China, China ranked No. 52/85 in the CORRUPTION
PERCEPTIONS INDEX. 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 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.

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).

4.2.3 Lack of Legal Safeguards for Intellectual Property Rights


The protection of intellectual property rights (IPR) is a major concern for foreign investors and
may deter foreign investment, particularly in high-tech sectors where multinationals may feel
discouraged from bringing their latest technology to China. Inadequate IPR protection damages
China’s economy, as it makes it more difficult to effect the transition from low value-added
assembly operations to high-value-added manufacturing, and it also strongly discourages
domestic innovation at a time when the government is spending record sums trying to
encourage it.

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).
Figure 4.3 “11 Furniture” – is one of the most notorious IKEA imitators. Yellow and
Blue company colors

So instead of enforcing legislation (which is quite week when it comes to these matters) IKEA
did what every brand must do in such environment – differentiate itself. By using local
microblogging website Sina Weibo (aka Chinese twitter), Swedish retailer targeted audience
that can appreciate brand values. Typically, it is individuals between 25-30 who have relatively
higher than average income and are open to Western lifestyle. IKEA’s social media team
engaged in discussions, shared user’s pictures with newly bought furniture. Additionally, IKEA
used this platform for dealing with customer’s complaints. After all, people want to see a brand
that is always “there” in case of any questions or issues. By communicating with its audience
in such manner, IKEA strengthened the brand and differentiated it from competition.

4.2.4 Legislation Unfavorable to Foreign Firms


Foreign investors are expressing increasing concern over perceptions that government policies
are discriminating against foreign-invested enterprises. For example, in 2011 the percentage of
European investors surveyed who thought policies to be discriminatory in 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.

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 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.

4.2.5 Economic Failures and Mismanagement


Swedish furniture company IKEA Group [IKEA.UL] is recalling almost 36 million chests and
dressers in the United States and Canada but said the products linked to the deaths of six
children are safe when anchored to walls as instructed (See Figure 4.4) . IKEA said that the
recall was based on a standard applicable in North America for free-standing clothing storage
units and that the products meet all mandatory stability requirements in Europe and other parts
of the world (Reuters –Business News, Wed Jun 29, 2016). However, it wasn’t until 12 July
2016 that IKEA extended the call to China after Xinhau news agency published an editorial
that said IKEA's decision against a more comprehensive recall illustrated the furniture maker's
"arrogance" and irresponsibility. At that time also IKEA's recall also didn't apply to the EU,
the company's biggest market. The recall was not applied in Australia and the customers were
offered free kits to fix the units to the walls. This is an example of a worldwide mismanagement
incident.

Figure 4.4 Demonstration of the Danger of IKEA furniture unit

4.2.6 Social and Political Unrest and Instability


So far, social unrest reportedly has not discouraged foreign investment overall, which continues
to grow and remain insulated from most protest incidents, while risk assessments for China
have improved or remained stable in the past two years. Nonetheless, most analyses of risk
factors in China make prominent note of social unrest and its potential threat to the country’s
social, economic, and political stability and its relations with the western world. Some analysts
assert that despite lower costs, some foreign investors in China may fear moving to smaller
Chinese cities or more remote areas because of fears of social unrest, and foreign companies
that attempt to lay off large numbers of employees may face organized resistance.It appears
that IKEA shall remain active in major cities to mitigate that risk.

Different Types of Country Risks and Mitigation Strategies

Risk Nature of the risk Mitigation of risks

Government Initially could not open 100% Things are getting better with time.
Intervention, owned store.
Protectionism and
Barriers to Trade
and Investment

Bureaucracy, Red Some legislation is not transparent IKEA seems to be coping well with the
Tape, limiting the expansion of IKEA in red tape and corruption in China. This
Administrative China was not the case with Russia when in
Delays and 2011 they issued a statement that they
Corruption shall not expand there any further.

Lack of Legal IKEA’s designs copied from the By communicating with its audience
Safeguards for catalogue and offered at a lower IKEA strengthened the brand and
Intellectual Property price differentiated it from competition.
Rights

Legislation New legislation in 2015 making it IKEA is already established in China.


Unfavorable to necessary to align the business
Foreign Firms plan with the “Catalogue of
Industries for Foreign Direct
Investment 2015”.
Economic Failures Recall of sub-quality furniture was IKEA failed to manage this risk. They
and Mismanagement not conducted simultaneously should have recalled the unit worldwide.
worldwide.

Social and Political There is a risk for social unrest in IKEA operating in large cities only.
Unrest and China in rural parts.
Instability
CHAPTER FIVE
CROSS CULTURAL RISKS

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 Chinese
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 its
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 workers
Decision making styles and innovators as they are afraid to in China to teach them IKEA company
loose face culture.

Cultural differences: Different aspects in the culture affect  Training for IKEA managers before
personality the personality of the people in that going to China.
culture.  Support for managers as they arrive in
China.
 Training for Chinese employees to
work with foreign IKEA managers.
Cultural difference: These are applied worldwide by  dedicate two-thirds forestry specialists
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 of officials to build trust and understand
China. Translation problems arise the local issues.
and some important info is lost.

Cultural difference: Former IKEA suppliers producing  IKEA ignored this and claim they are
Ethical practices copies of IKEA’s furniture and sure of their customer loyalty.
selling it online