Corporate Nov 26, 2012
Ikea's troubles in India are compounding, that too even before it makes an entry.
After the Foreign Investment Promotion Board struck out most of the items in their products list, the government is planning to force the company to conform to strict conditions on sourcing.
The idea is to ensure the company that Ikea proposes to set up for sourcing does not resort to cheaper imports instead of sourcing locally, according to a report in the Economic Times.
Ikea's plan is to set up two companies in India, one for retail stores and the other for sourcing.
The report quotes a government official as saying the separate company Ikea sets up for sourcing of products "sources them from India and does not rely on cheaper imports from other countries".
On Saturday, a government official had defended the decision to not allow the company sell products other than furniture in India.
"It's a single brand approval. So they can sell those items which they can brand," Arvind Mayaram, economic affairs secretary at the finance ministry and one of the members of the FIPB, was quoted as saying in a Reuters report.
Ikea is still evaluating the various restrictions the government has put for the company's India entry.
However, this could just be the beginning of its troubles in India, because India is a low income economy, where multinationals need to adopt a different business model altogether.
For example, in the post-liberalised era free home delivery has not just been a rule but a consumer habit in India. But, according to media reports, in Ikea's business model, charges for delivering and assembling the furniture are to be born by the customers.
Another major issue is likely to be finding enough space for its huge stores. The increasing retail rentals are also likely to be push up the operating costs of the company.
But still the company is likely to stay put and fight it out in India, because an estimated $18.5 billion home dcor and furniture market that is growing 10-12 percent a year is something it can't let go that easily.
The government knows this and may be this is why it is flexing its muscles, even at the risk of losing a hefty 1.5 billion euro capital inflow.
More From Rajesh Pandathil.