Bose and Matthias Williams, Reuters
Delhi, 22 June 2012
retailer IKEA , the world's largest furniture maker, is opening
up in India, marking a crucial step for the Indian government
whose policy flip flops related to foreign investment have damaged
The company, known for huge stores selling flatpack furniture
and accessories, said it would invest 1.5 billion euros ($1.9
billion) to open 25 stores in Asia's third-largest economy after
initially balking at India's sourcing requirements.
IKEA's plans, announced by the Indian government after a meeting
between the company's CEO and India's trade minister in Russia,
could give a boost to the embattled government of Prime Minister
Manmohan Singh, which was forced in December to backtrack on plans
to allow in foreign supermarket operators.
While the government removed foreign investment caps in single-brand
retail in January, it imposed a condition that foreign retailers
source 30 percent from local small and mid-sized enterprises,
dampening the enthusiasm of retailers for the plan.
"It's a baby step but it has definitely sent the right
signal out ... The government is trying to convince international
investors, India is still open for business," said Devangshu
Dutta, consultant with Third Eyesight, a retail consultancy said.
The Indian economy which grew at its slowest pace in nine years
has been badly hit by political roadblocks to economic policymaking
battering corporate investor sentiment.
But the company, following similar moves in China and Russia,
plans to cash in on India's burgeoning urban middle class, which,
having grown up on pop culture, generates a strong demand for
owning international brands and lifestyle products such as furniture.
On Friday, India said the company had discussed its reservations
over the sourcing policy with the government.
"IKEA had certain reservations about sourcing norms which
were discussed with the DIPP (Department of Industrial Policy
and Promotion) officials; suitable answers of which were provided
leading to the decision to invest," the Indian government
said in a statement.
The company does not yet have any stores in India but sourced
$450 million worth of goods from the country last year, a figure
it aims to lift to $1 billion in coming years.
It sources goods such as textiles and carpets from 70 suppliers
and 1,400 sub-suppliers in the country, the company said.
"The mandatory sourcing clause that requires goods to be
sourced from small and medium enterprises will remain a challenge,"
IKEA spokeswoman Malin Pettersson Beckeman told Reuters by phone
The Singh government is keen to bring global supermarket chains
such as Wal-Mart Stores Inc and Carrefour SA into India, in hope
of improving the efficiency of supply chains in a country where
roughly one-third of fresh produce rots before it gets to market.
However, foreign direct investment in supermarkets has been opposed
by owners of one-off shops, which account for roughly 90 percent
of India's $450 billion retail sector, as well as by members of
the ruling coalition.
IKEA said its investment will be made over 15 to 20 years.
India's Commerce Ministry said IKEA will initially invest 600
million euros and a further sum of up to 900 million.
"These investment estimates have been drawn up based on
our experience in countries like China and Russia," Beckeman
Industry officials, however, said that the Swedish firm's entry
will not really shake things for the domestic market given the
number of stores it plans and the period of investment.
"It's not going to shake up the entire domestic market
but it will set a benchmark model for others to follow in India's
nascent furniture and home products market," Dutta said.