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Where to with IKEA, China?

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Marvin A. Tort

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Where to with IKEA, China?

Of the business developments in the last two days, what stand out — at least, in my opinion — are the commitment of furniture manufacturing giant IKEA to invest initially about P7 billion in putting up a Philippine store; and the government’s signing of more than 20 agreements with the People’s Republic of China on the occasion of the state visit of Chinese President Xi Jinping.

Between the two deals, many pundits will claim the IKEA investment is definite, with a local store set to open by 2020, while the China agreements are perhaps just a few notches above lip service. The latter, after all, are mostly Memoranda of Understanding, which may or may not result in actual or concrete investments or assistance from China in the future.

While these two developments appear independent of each other, I view them as intricately linked — with China as the common denominator — with respect to overall implication for the future of Philippine trade. China trades with its West by looking to its East, and we are smack in the middle of that. Meanwhile, we trade with Europe by looking to the West, and China is there in between. This, I believe, is a situation that we should exploit to our advantage.

The IKEA investment in a new store in the Philippines, touted to become the brand’s largest in the world in terms of size, may just be the start. That P7 billion investment, in dollar terms, is roughly $135 million. This is not really much, considering that it also includes “inventory” for the new store. The Philippines’ aim, in my opinion, should go beyond leased area and retail, and actually encourage IKEA to manufacture in the country.

This is for the simple reason that our people need work. And for what is touted to be a large investment, IKEA’s P7 billion is forecast to create only about 500 new jobs, and I guess consisting mostly of sales people and material handlers. Although the company also claims its investment will create spin-off jobs and business opportunities in logistics, food supply, transport, waste management, and security.

Long term, China can play a role in this, if its agreements with the Philippines can bear fruit. For one, a successful joint venture on oil and gas development between the Philippines and China can result in lower energy costs, which in turn can encourage more manufacturing; while successful cooperation in information and communication technology can boost e-commerce.




Successful infrastructure cooperation between the Philippines can also lead to new rail lines and thus boost logistics, while a joint project for industrial park development can provide for suitable locations for manufacturing facilities. In fact, it can make sense for IKEA to move some manufacturing in China to the Philippines, to bring products closer to the Southeast Asian market.

As of a year ago, IKEA reportedly owned and operated 415 stores in 49 countries, selling about 12,000 products. Its biggest market is reportedly still Germany, with 53 stores, and then the US, with 50 stores. It opened its first store in India last August, and it reportedly sees India as becoming its largest market in the future. Although the Philippine store that is opening in 2020 is still expected to be the largest in terms of size, so far.

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But targeting manufacturing — more than retail — is crucial to us. IKEA products are designed in Sweden, but they are all mostly made abroad, particularly in developing countries where costs are lower. A subsidiary in Southern Poland reportedly manufactures the wood-based products, but the particle boards used in production are supplied solely by a factory in Southern Sweden. To date, IKEA reportedly has over 16,000 employees across 50 sites in 10 countries to manufacture the 100 million pieces of furniture that it sells annually.

We need to become an IKEA manufacturer. In fact, we need to significantly boost manufacturing and industry if we want to sustain the economy’s growth and continue to provide for a growing population that is now over 100 million Filipinos. Investments from China and other foreign partners will play a big part in improving the countries’ capabilities in attracting business like IKEA to make products here.

I am uncertain how much IKEA produces in China, and how much of its Chinese production is exported abroad. But, about five years ago, one business report indicated that IKEA’s Chinese manufacturing produced mostly for the Chinese market. At the same time, to remain competitive in China, IKEA has had to rely on local sourcing to cut costs and sell at prices lower than in other markets. In this line, I am uncertain if manufacturing in China will be sustainable for them.

A recent report from CNN Business also indicate that IKEA is now under fire in China “for how it describes Taiwan, making it the latest in a string of global brands that have fallen foul of Beijing’s political sensitivities.” The public as well as state media have reportedly taken issue with IKEA packaging “that appeared to suggest that Taiwan is a separate country.” Given such non-business issues, perhaps it can consider doing some manufacturing here.

Meanwhile, we should also start exploring more products that can be made here and can be sold to China — either as raw materials, intermediate goods, or finished goods — that can eventually make their way to Russia and Europe. China is now our Asian gateway for these markets, and we should take advantage of our relations with Beijing to tap them. We need to get our goods into the high-speed train system that has been built that runs from China to Russia and Germany and back.

Two rails run the China-Europe route, running from Zhengzhou in Eastern China and through Central and Western China, and into Kazakhstan and Russia, and all the way to Poland and then Germany, particularly to the port city of Hamburg. Strong cooperation between Deutsche Bahn AG and China Railways starting 10 years ago has made this possible.

The two main rail lines are used by DB Schenker for freight, and are forecast to have carried around 90,000 containers between China in Europe this year. The project, reportedly the longest train connection in the world at 10,000 kilometers, started in 2008. Since then, freight has significantly risen in the last two years from 30,000 containers in 2016 and 80,000 containers in 2017, to 90,000 containers in 2018.

This train connection can now allow the Philippines and other Southeast Asia-based manufacturers to ship goods to China, which can then travel by land on rail — instead of mostly by sea — from China all the way to Poland and Germany. The freight rail is comparable to the ancient Silk Road that connected the East to the West.

For companies like IKEA that design in Sweden and manufacture in Poland, and with the biggest number of stores in Germany, this rail connection from Europe to China and back can provide a number of logistical and market advantages. The same with producers in the Philippines and other parts of Asia, but only if these see value in boosting relations with the “Middle Kingdom.”

 

Marvin Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippines Press Council.

matort@yahoo.com

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