Editor’s note: this article was translated and edited from an article featured on Wenxuecity.com. It looks into the after effects of several Chinese suppliers who were recently struck off IKEA’s supplier list. The article also speculates about the uncertain future of Chinese suppliers in the wake of policy changes by Western industries and the rise of neighbouring economies.

With countless Chinese OEMs (original equipment manufacturers) manufacturing all kinds of products for companies both domestic and foreign, many have dubbed China “the factory of the world.” However with recent adjustments regarding the policies of American and European production, coupled with the rise of industry in neighbouring countries, the future for China’s OEMs is starting to look bleak. Last year, several China-based branches of the Swedish furniture giant IKEA announced that they were ceasing their supply of products from Chinese OEMs, which caused shockwaves across the industry. But what caused IKEA to suddenly cease its contracts with Chinese OEMs?

Former suppliers – the after-effects

Naili Wood Company is one of IKEA’s former OEMs who was recently struck off their supplier list. Based in Heilongjiang Province, the Naili workshop shows obvious signs that the recent rejection by IKEA has taken its toll. Although all the machines are still running, there is a noticeable lack of workers, with some sections of the factory only manned by a single employee. The workshop controller explained that the workforce has been slashed from 700 to 200 over the past few years, and that currently, most workers are only able to come in on a part-time basis.   

Four years ago, Chairman Cao Yuewei spent around 35 million RMB to build the new factory, predicting that the demand of products from IKEA would give him huge profits in the long run. However, only three years after opening, IKEA decided to cease its operations with Cao’s factory. While explaining his difficult situation to a reporter, Cao received a text message—a plea from a friend experiencing similar troubles. The messaged read: “It’s almost Chinese New Year, could you possibly help me out with another 600,000 RMB? I’m so sorry.” The reporter asked, “Why doesn’t he call you and ask for help?” Cao replied “a few days ago I gave him 1 million RMB. He obviously feels bad.” The sender of the message was Song Houcheng, who is also a former supplier to IKEA.

Making up the list of former IKEA OEMs, are Naili, who’d worked with IKEA for 16 years, Song Houcheng’s Houcheng Wood, who’d worked with IKEA for 13 years, and Yichun Huali Wood, who’d supplied them for 11 years. After losing their contracts with IKEA, these OEMs are all facing an uncertain future. Yichun Huali Chairman Qu Jinchang stated that he has yet to find other supply contracts for his furniture, stating that the prices were too high and the orders were too small.

Most of these furniture company bosses aren’t young, averaging at around 60 years old or so, though many are still willing to take the necessary risks to ensure they obtain the right amount of business. Upon looking at the transactions between IKEA and these OEMs, the reason behind their decision to cut their dealings can be seen.

Lowering prices

Between March 4 and September 20, 2009, the cost of each table was 30.38 USD, which then dropped by 2% to 29.77 USD on September 21. At the start of the financial year in April, the price dropped by 2% once again, and then fell another 2% during 2010. Upon reading the details of the orders on the contracts, the reporter found that this pattern of price dropping emerged throughout.

After 2008, the prices of raw materials increased, as did the wages of the factory workers, with monthly salaries increasing from 1,400 RMB to over 2,000 RMB, which cut OEM profits even further. They were expecting to negotiate new contracts with IKEA to make up the losses, though these never came to pass. Qu Jinchang reiterated that IKEA wasn't afraid of not receiving the goods from the OEMs, they simply demanded that the purchasing prices were lowered by 5%.

A table in 2009 cost 29.77 USD, though came with a production price of 175 RMB, which coupled with a 10% financial cost and equipment depreciation cost meant that the OEMs only just broke even. IKEA also demanded that the goods were picked up at Harbin’s inland port, which meant the OEMs lost money after they paid for the appropriate transportation fees.   

Qu Jinchang said, “After losing money for three years, we had absolutely no hope. Before, we were able to discuss our yearly deficits with IKEA, though this time we’ve simply had to stop supplying.” Cao Yuewei added, “IKEA were the ones who nurtured our company, now they’ve gone and killed us.”

IKEA’s announcement of their decision to cease cooperation with many Chinese OEMs attracted the media’s attention. Despite repeated failed attempts to get some answers, the reporter managed to get in touch with the IKEA Purchasing Director for China, Peter Wisbeck. During the interview, Wisbeck admitted that costs were on the rise, and that they asked for their suppliers to lower their prices. Wisbeck stated that they didn’t wish for this to happen, though IKEA’s actions were perfectly reasonable and just. Wisbeck said that IKEA is aware of rising costs for manual labor and raw materials, though doesn’t believe that the overall product cost should increase. “Four or five years ago, we worked with quite a few different OEMs. In many cases, they had a lot of potential to improve their resource optimization and productivity. Upon being asked what IKEA thought of the recent disownment of OEMs, Wisbeck said, “I think it’s just a natural process. During the purchasing process we frequently upgrade our supply bases, which means we begin negotiations with new OEMs, and end our cooperation with others.”

IKEA recently announced that their profits for the 2012 financial year increased by 8% to 3.2 billion Euros, with their revenue increasing by 9.5% to a record-breaking 27 billion Euros. Additionally, the 2012 fiscal year saw IKEA’s prices drop by 0.8%.

IKEA have always maintained a strong adherence to low-price strategies, with OEMs who fail to adjust to it simply being tossed aside. Although it sounds cruel, it’s a daily occurrence when looking at the problems facing many of China’s OEMs. During Barack Obama’s recent State of the Union address, the U.S. President stated that in 2013 that he would stop outsourcing and look to revitalize America’s manufacturing industry. This hints at a very uncertain future for many Chinese enterprises.

Online IKEA imitation – a new market?

As well as trying to locate new contracts, the OEMs who previously worked with IKEA are also looking to create a whole new market. In 2012, a furniture company named Joyme was founded, and began selling their products online. Upon arriving at one of their shops in Mudanjiang, the reporter noted that the interior looked just like a small version of IKEA, especially given their of use blue and yellow in many of their products. Joyme’s designers have even admitted to directly imitating IKEA’s style. For OEM bosses like Cao Yuewei and Qu Jinchang however, this is the new market.

Cao said that due to their previous longstanding cooperation with IKEA, they are familiar with the designs and can provide a similar service to Joyme. Cao has chosen work with online-based companies such as Joyme, which made sales of around 2 million RMB on Tianmao in its first month of operation. “If I continue down the old route, I’ll never be able to match their demands. I have to keep up with the trends and embrace the world of online business.”

But does product imitation such as this suggest piracy? Peter Wisbeck stated that “many of our designs are very popular in China, and I think what companies like Joyme are doing is fine. Our current goal is simply to offer better products and open new stores within the next year.   

Cao Yuewei is hoping that IKEA won’t decide to sue Joyme, and is certain that after a short amount of time, the new company will branch away from the IKEA mould and develop its own style. Regarding the matter of intellectual property, IKEA and Joyme haven’t yet come to conflict. Cao hopes to increase his product variety and increase sales in the coming months, which he hopes will eventually restore his factories to their former full-functioning glory.
 

Source: Wenxuecity.com

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Keywords: Chinese OEMs