Hitch in IKEA’s plans to conquer India

SOURCE OF CONFLICT::The Indian government welcomed the furniture company’s interest, but insisted it source materials from small businesses to protect local industry


Mon, Jul 09, 2012 - Page 15

A dispute over sourcing regulations is clouding plans by Sweden’s IKEA to open 25 of its trademark blue-and-yellow stores in India as it seeks new markets for its flat-pack furnishings.

IKEA last month asked India for permission to launch retail operations in India, promising to invest US$1.9 billion over the coming years — part of a broader push into emerging markets including China and Russia.

IKEA’s request gave a vital boost to the Indian government, which hailed it as a sign that global investor confidence “is still intact” despite a sharply slowing economy, a slew of corruption scandals and suffocating red tape.

However, now New Delhi’s insistence that the world’s biggest furniture retailer source 30 percent of its supplies from small Indian manufacturers has become a sticking point.

India defines “small business” as any firm whose plant investment does not exceed US$1 million. IKEA says small firms would fast outgrow the cap after they started supplying the Swedish giant and become much bigger players.

“Small industries need to be allowed to grow and develop,” IKEA spokeswoman Josefin Thorell said in an e-mail late last week, adding it was important that the definition of small industry provide “flexibility.” IKEA says suppliers should continue to qualify as small businesses even after they exceed the investment ceiling. It has also asked that its compliance with the sourcing target be calculated over a 10-year span rather than one year, saying it would be “impossible for the IKEA Group to meet this requirement from day one.”

Indian media at the weekend reported government divisions over IKEA’s bid for relaxation of the sourcing rules that critics say discourage overseas investment.

The sourcing stipulation is part of efforts by the center-left government to defuse populist opposition to the entry of big foreign retailers in a country where small mom-and-pop stores dominate as well as to boost local industry.

India’s Business Standard newspaper said the government body responsible for industrial development had agreed to tweak the rules to suit IKEA.

However, the Times of India said the small business ministry opposed any dilution of the regulations on grounds it would hurt small enterprises.

Given IKEA’s high-profile and Indian Prime Minister Manmohan Singh’s statement on Friday that he wants to make the country a “more business-friendly place,” most analysts believe a compromise will be found.

IKEA, which in 2009 scrapped plans to enter the market due to regulatory concerns, says it has a “long-term vision” for India.

“Keeping in mind IKEA’s stature, I’m sure the government will work out something,” said Saloni Nangia, president of retail consultancy Technopak.

“Meeting the 30 percent sourcing target will take time — IKEA just wants some latitude,” she added.

Privately held IKEA says it is “eager” to open stores in the country of 1.2 billion people, but has set no target date.

It made its investment announcement after India allowed foreign retailers selling one brand to own 100 percent of their Indian businesses, instead of 51 percent, as part of moves to liberalize the sector.

IKEA sees huge potential in India’s burgeoning middle class whose “wallet is still thin,” but who want “inexpensive but nice home furnishings,” IKEA chief executive Mikael Ohlsson said on a scouting mission to India two years ago.

“It will be good for IKEA to have such a large market. Even with the economy slowing, the retail market has a strong future,” Nangia said.

Technopak estimates the retail market is generating sales of US$470 billion a year — of which only US$27 billion comes from “organized retail” or chain stores.

Retail sales are seen hitting US$675 billion over the next five years — out of which US$85 billion will come from chain stores.