IKEA IN CHINA

EMMA FENTON
10314305
BCHN30070

Introduction
In this report I will be examining Ikea in the Chinese market. I will first conduct a company analysis using
porters 5 forces and SWOT frameworks. After this I will highlight the key issues of IKEA in China, from
which I will analyse IKEAs market entry into China. Finally, I will discuss my recommendations for IKEA in
the Chinese market. Appendix and references included.

Company analysis
Porters 5 forces (See appendix 1)
In terms of supplier bargaining power, through analysis this can be established as low due to several
factors. China, for many years has been dubbed as the factory of the world due to its low production and
labour costs. From this culture has brought about a multitude of various suppliers available to foreign
firms such as IKEA. Because of this IKEA is not restricted to one supplier and therefore can demand high
quality at a low price, and if not accepted by one supplier, can be offered to another. In recent times IKEA
has recently ceased contracts with suppliers such as Joyme, where issues of falling profits due to low
contract prices offered by IKEA were to blame. Many of these OEMs now struggle even more without the
business from IKEA. (CCTV, 2013)
On the other hand, Chinese buyer power can be ranked as high as this is one of the main factors which
has changed IKEAs strategy in China. Chinese consumers always expect high quality but at the same time
also look for the lowest price. (Tian, 2007) When IKEA first entered the Chinese market, although their
prices were seen as low to other European counterparts, relative to the Chinese consumer they were
quite high. Due to this fact IKEA was forced to lower prices, which in turn caused a chain reaction within
the value chain, forcing IKEA to look for ways to reduce costs in all areas.
The threat of new entrants into the market can be positioned as low due to the Chinese market culture.
IKEA entered the market through the support of a joint venture in 1998 and also had roots established
from its procurement activities. This has helped IKEA maintain power within the market, as with the case
of the failure of retail giant Home Depot in the Chinese market. It was late to enter the market in 2006
and with that failed to build their culture knowledge of the market. (Burkitt, 2012)The Chinese market
also poses many trade barriers such as the law of the People's Republic of China on Chinese-foreign joint
ventures, which requires foreign companies to enter into a joint venture if they wish to enter the market.
The intensity of rivalry in the Chinese market for IKEA is very high, as now with the cancellation of
contracts with suppliers, they are now becoming direct competitors with IKEA and now have a similar
knowledge competency. B&Q, a British store, is also well established in China. IKEA has often been
lagging behind in terms of store set up. IKEA also faces online competition with the multiple retailers that
sell on sites such as Taobao.
Threat of substitutes can be ranked as high as now many manufacturers in China can effectively copy not
only the products, but also the store experience. An example of this can be found in Kunming, where a
furniture store has essentially created a pirate version of the Ikea store layout.

SWOT analysis (See appendix 3)

According to the SWOT analysis, Ikeas strengths lie in its strong brand image internationally, which it can
leverage to attract Chinese consumers. They also have years of international experience and low cost

culture experience. These two combined offer them a strong understanding of the marketplace and the
competencies needed.
In terms of weaknesses, IKEA now faces an uneasy relationship with its suppliers as it continuously
demand lower prices but still wants high quality goods. These relationships could cause major supply
chain management problems not only for the Chinese business but also their other international stores.
Another weakness is the European culture. Although it attracts Chinese consumers, it is also hard for IKEA
to align the European and Chinese culture. This is also relevant to the IKEA DIY culture. Many Chinese
consumers prefer to have the furniture assembled for them, and so IKEA had to begin to offer a delivery
and instillation service. Due to the vast numbers who need these services, IKEA had to also significantly
lower the delivery prices.
There are many opportunities that IKEA can exploit such as the growth of the middle class and Chinese
GDP, meaning that the purchase power of the Chinese consumer is improving. IKEA is also continuing its
growth plan by moving into middle size cities such as Ningbo, which will help IKEA achieve their overall
growth strategy.
Threats include the power of the Chinese government and legal system, which favours domestic firms.
This can be seen in the lack of intellectual property protection in China, which could result in more and
more fake IKEA stores appearing. IKEA also is under threat by the popularity of online shopping
merchants, who can provide similar products at lower prices.

Key issues
Economic factors
Looking at SWOT analysis, one of the major problems, resulting in profit loss by IKEA, was their pricing
strategy. Competitive advantages in the western markets in terms of low cost pricing, was not realised in
China, as a low cost culture was the norm. From the porters 5 forces analysis, we can see that the buyers
also have a great bargaining power, which constantly put IKEAs pricing strategy under strain. As a result,
IKEA reduced prices, which in turn translated to lower profit margins and in some cases losses.
Even though Chinas GDP was experiencing high growth levels, most of IKEAs consumers only earned
3000 yuan per month, while their pricing strategy targeted consumers with a 6000 yuan or more salary.
This pricing strategy caused IKEA to be viewed as a luxury foreign brand. Once prices were lowered
Confusion also came about, as from a social context, western goods are perceived to be more valuable
and because of this were higher priced. Having low priced western goods, did not sit well with the
western values sought after by Chinese consumers.

Country specific factors

According to the PESTEL analysis (see appendix 2), there are many legal implications for entry into the
Chinese market. In order to overcome these trade barriers, IKEA had to enter into a joint venture, even
though they controlled the management, it did halt the expansion process as land ownership was only
acceptable through the Chinese partner. This limited IKEAs reach in the Chinese market and in turn
limited the pool of potential customers.
Another legal implication highlighted by the PESTEL analysis was the lack of IPO laws in China. As a result,
it was very hard for the IKEA products not to be copied. This caused a backlash effect of the distribution
of their catalogue, as it became a cookbook for other manufacturers to copy. (Wei & Zhou, 2007)

Cultural factors
For a long time IKEA did not adjust its business operations to fit into the Chinese culture. According to the
PESTEL analysis, Chinese consumers favour western styles and often try to emulate them in many areas in

their life including furnishings. As previously discussed, these products are seen as high quality and so
high prices are also expected. Balancing these expectations with the low prices of the Chinese furniture
markets, caused many difficulties for IKEA.
Many Chinese consumers also did not own a car, so locating in suburban areas with a well-established
public transport system was vital. This challenged IKEA is terms of store scale, as finding a location that
would be large enough for the store and nearby a good public transport system was hard to come by.
These cultural factors meant a drastic change in the business operations of IKEA. IKEA had to build on and
improve its delivery and instillation service for Chinese customers, as the culture of DIY was in little
existence in the furniture market, as unlike western counterparts, labour costs were inexpensive and had
to be built into the total IKEA service.

Entry strategy analysis

The biggest difficulty for IKEA when entering China was the legal systems and trade barriers. Initially
Ikeas 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. (Wang, 2011)
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 fulfil 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 maximising its expansion and also led to
compromise in their store design, as it wasnt 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. Originally the stores were not capable of accommodating the
all day Chinese shoppers, but since wholly owning the stores, have been able to adjust the layouts to
maximise the Chinese consumer experience and as a result have increased in popularity with Chinese
consumers attributing to a 17% increase in sales in 2013, making China one of Ikeas fastest growing
markets. (BBC News, 2013) As of 2013 has 16 stores in China, with two new stores in Ningbo and
Baoshan, set to open within the business year.

Recommendations
Pricing strategy
One of the key issues for IKEA is the need for a low price strategy while maintaining brand allure. In the
old strategy, IKEA target families which limited the market scope. My recommendation for IKEA is to
target the DINK (Double Income No Kids) and the young professionals.
In Shanghai alone DINK families account for 12.4% of the total population (China.org.cn, 2013). With
more disposable income than their child bearing counterparts, they would not be as sensitive of higher
pricing for high quality foreign goods, which would feed the show off mentality that many possess.
The older Chinese population tend to favour price over quality, but the younger Chinese consumers are
now more willing to pay a premium price for high end goods. Shoppers in their 30s in particular tend to
be in the demographic of furniture consumers and look more for quality over price. (Qiu, 2011)
In order to fulfil maximum consumer reach, IKEA should offer a variety of blitz sales that will boost store
attendance and also widen the pool of customers. IKEA should lower the price of many frequently priced
items and keep less purchased items at a higher price on more impulse purchases and price insensitive
products.

Marketplace Expansion
IKEA now has a lot more freedom in terms of store ownership after coming out from the joint venture.
IKEA has achieved success in the major cities but should place more focus on aggressive expansion in the
2nd and 3rd tier countries as they have the most promising economic forecasts and can be exploited
before the market there becomes saturated.
With the rising wages in the coastal region, as well as the rising importance of the domestic market in
inland provinces, we believe that there will be major moves by companies to relocate their production
bases into the inland provinces, with cheaper production costs and easier access to the inland markets.
-Credit Suisse

Cultural acceptance
IKEA should look to translate their understanding of culture to all areas of the business including the
online store. Effort should be made to make connections and collaborative efforts with Taobao and
alibaba to include their online payment systems for IKEA products.
IKEA should look for cultural adaptations of popular products to cater for the Chinese consumers. This
can include the products in the canteen, such as offering dumplings or other famous Chinese dishes.
Some store products can be made China specific such as chopstick holders, or decorated items for the
Chinese New Year.
In order to cater for more customers, IKEA can look to provide shuttle bus services for populated local
areas. This would attract more customers to come to the stores and get involved in the IKEA experience.

Conclusion
When IKEA initially entered the Chinese market it seemed to overlook many key elements of satisfying
the Chinese consumer and in turn failed to gain profits. I think that they were very fortunate to have
entered China in terms of a joint venture, for the fact that if they had gone on their own the negative

results would have had a greater impact on their overall business. However, I do believe they have
learned from these mistakes and are very flexible with their Chinese business strategy. If they wish to
gain dominance in the market they will have to keep and possible increase this level of flexibility.

Appendix
Appendix 1: Porters 5 forces
Porters 5 Forces
Bargaining Power of Suppliers
LOW
Bargaining Power of Buyers
HIGH

Analysis
Always require high quality at low price
Large OEM Chinese market
Use of other international suppliers
Chinese consumers are very price
sensitive
IKEA low prices seen as high in China

Threat of New Entrants

LOW

Home Depot previously entered and

failed
Marketplace culture
High capital investment

Intensity of Rivalry
HIGH

Previous suppliers now rivals

B&Q previously established

Threat of substitute
HIGH

Original European style

Copycat OEM manufacturers
Fake IKEA stores

Appendix 2: Pestel analysis

PESTEL
Political
25% corporate tax
Guanxi culture
Encourage domestic produce
New Plenum
Member of WTO
Economic
Rapid GDP development
Largest furniture buyers after US
Low labour and production costs
Increase in FDI
Shift to free market
Exchange rate: 1yuan=0.12 euro

Social
Adoption of western culture and style
High power distance
show off mentality
Generations live together
More environment conscious
Technology
Development of distribution systems
Development of payment systems
Rapid development of information technology, especially in terms of social networking
Advanced e-commerce system
Environment
Green procurement
Copy culture
Eco friendly
Legal
IPO laws
Guaxi vs law
Joint venture
Property laws
Opening hours

Appendix 3: SWOT Analysis

SWOT
Strengths
Brand Image
Low cost culture experience
Unique business model
Global experience
Weaknesses
Uneasy relationship with Chinese suppliers
European culture
DIY culture
Delivery system
Opportunities
Growing middle class
Expansion to middle size cities

Threats
Chinese government rulings
Fake stores
Time Zone issues

References
BBC News. (2013, November 4). Ikea gets its China formula right helping boost sales. Retrieved from BBC
News: http://www.bbc.co.uk/news/business-24799515
Burkitt, L. (2012, September 14). Home Depot Learns Chinese Prefer 'Do-It-for-Me'. Retrieved from
online.wsj.com:
http://online.wsj.com/news/articles/SB10000872396390444433504577651072911154602
CCTV. (2013, February 20). IKEA's China manufacturers face tough times. Retrieved from www.china.org:
http://www.china.org.cn/video/2013-02/20/content_28010909.htm
China.org.cn. (2013). Childless Couples. Retrieved from China.org.cn:
http://www.china.org.cn/english/NM-e/60094.htm
Qiu, Y. (2011, July). Understanding Chinese Consumers. Retrieved from china business review:
http://www.chinabusinessreview.com/understanding-chinese-consumers/
Tian, X. (2007). Managing International Business in China. Cambridge University Press.
Wang, S. (2011). Determinants of MNCs entry mode strategies in China. Uppsala Universitet.
Wei, L.-Q., & Zhou, X. (2007). IKEA in China: Facing Dilemmas in an Emerging Economy. ASIAN CASE
RESEARCH JOURNAL.