IKEA for give-and-take on India sourcing

While announcing its India entry application, IKEA, the Euro 25-billion Scandinavian furniture major, has made an offer to the government for a long-term effort on sourcing of products from the country.

While raising the foreign direct investment (FDI) limit to 100 per cent in the single-brand retail segment six months earlier, the government asked retail chains with over 51 per cent foreign investment to source at least 30 per cent of the value of products sold in the country from Indian small/village/cottage industries, artisans and craftsmen. The guidelines are silent on taxes and duties in defining the calculation of value/sales.

The company planned to double the sourcing for its global operations from India to around $1 billion (nearly Rs 5,700 crore) by 2016, Commerce Minister Anand Sharma said after IKEA announced its India entry plans in St Petersburg, Russia, on Friday. That was after a meeting between him and IKEA chief Mikael Ohlsson.

With 287 outlets across the world, IKEA has filed an application with the department of industrial policy and promotion (Dipp) to invest Euro1.5 billion (Rs 10,500 crore) over 15-20 years to open 25 stores, restaurants, food marts, nursing homes and publications. It is learnt to have proposed that it would compute its mandatory 30 per cent sourcing requirement based on its sales in the India market “exclusive of all taxes and duties”, thereby committing to buy more from the country.

In its application, IKEA said, “Based on projected sales per IKEA retail store in India, the group believes it could currently open only two to three stores, based on the current sourcing values.” The group had a vision of establishing 10 stores over a 10-year horizon and around 25 stores over a longer period, it said. In a related development, IKEA has pressed for a change in the definition of micro, small and medium enterprises (MSME). The MSME ministry is already working on such a change, raising the ceiling on the investment in plant and machinery in this segment.

On this matter, the commerce and MSME ministries seem to be on the same page, though they have been at variance over the 30 per cent sourcing clause.

In a statement, IKEA said, “For the group to secure low prices and truly benefit the Indian economy and society, small industries need to be allowed to grow and develop. It is, therefore, important that the definition of small industries in the future is reviewed and provides flexibility.”

An IKEA spokesperson from the Sweden head office told Business Standard the challenge related to sourcing remained in the long term. As for now, she said the company would take one step at a time and plans for the first store and India expansion would be announced after IKEA got government clearance.