How IKEA Chopped, Hollowed Out and Flattened Its Furniture to Cut Costs | Kanebridge News
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How IKEA Chopped, Hollowed Out and Flattened Its Furniture to Cut Costs

With inflation squeezing consumers and material and shipping prices up, the company took products back to the drawing board

Wed, Apr 26, 2023 8:22amGrey Clock 5 min

ÄLMHULT, Sweden—Amid IKEA’s colourful staged living rooms, piles of umlaut-laden housewares and endless rows of flat-pack boxes is furniture that can have shoppers wondering: How does that chair cost only $35?

IKEA grew into a furniture behemoth with a relentless focus on keeping costs low, but that goal has become more challenging. The price of metal, glass, wood and plastic have spiralled up, as have shipping costs. Inflation has squeezed consumers’ wallets. Managers at IKEA knew that something had to change to keep prices down and profits up, so in the past couple of years they have taken some of their products back to the drawing board.

Designers experimented with ways to reduce IKEA’s reliance on wood—even in its trademark wooden furniture—to cut material and shipping costs. Lighter, less expensive plastics, they discovered, could be used instead in cabinet doors and drawers.

They learned that they could substitute less expensive recycled aluminium for zinc, which had doubled in price over two years to $4,371 per metric ton after the start of the Ukraine war. Recycled aluminium is now going into bathroom hooks and other products.

When they turned to packaging, they cut freight costs by purging flat packs of “fresh air and wasted space,” said Fredrika Inger, IKEA’s global range manager. On the new Nämmarö garden chair, the curved wooden slats featured on a previous model were straightened, which allowed the components to be packed more tightly together.

“Our budget is the customer’s wallet, and their wallets are smaller than ever,” said Susanne Waidzunas, global supply manager at Inter IKEA Holding BV, the company that owns the IKEA brand, develops its products and manages its supply chain.

Based in Älmhult in southern Sweden, where the late Ingvar Kamprad founded the company eight decades ago, IKEA is today the world’s biggest seller of furniture, with 460 mostly franchise-operated stores spread across 62 countries that carry some 9,500 products. Its in-store canteens serve 1 billion Swedish meatballs with cream sauce and lingonberry jam each year.

Mr. Kamprad, who died in 2018, believed in “democratic design”—essentially that everyday products should be attractive and functional, but also affordable. It was, in part, a hard-nosed strategy designed to maximize sales.

The challenges started with the disruptions of the Covid-19 pandemic, compounded by Russia’s invasion of Ukraine. Then high inflation presented many companies with a dilemma: raise prices to offset growing costs and risk alienating customers, or keep prices down and sacrifice profit margins. IKEA did some of both last year, and its annual profit halved, to 710 million euros, equivalent to $778 million, despite record sales.

As part of its push to boost profits, the company said last week it would spend 2 billion euros to open new U.S. locations over the next three years—its largest-ever investment in new American stores.

One of the company’s chief weapons in its fight to cut costs is the Billy bookcase, a bestseller considered the “heart of IKEA,” said Jesper Samuelsson, the product’s manager. Over 140 million units have been sold since it first appeared in the 1979 edition of the IKEA catalog. The company says someone, somewhere buys a Billy every five seconds—which comes out to around 6.3 million sales a year.

According to IKEA’s official history, the Billy’s original design was scribbled on a napkin after its creator, Gillis Lundgren, was inspired by criticism from IKEA’s then-advertising manager that the company’s bookcases lacked simplicity.

Now, Mr. Samuelsson said, IKEA colleagues have a game they play: “If you’re a product in IKEA, which one are you? I’m Billy—it’s a very simple, straightforward product.”

The Billy comes in two styles: white and wood finish. Its last major overhaul came in 1999, when the company changed its method for producing the white version. IKEA designers knocked a fifth off the unit’s price by replacing its white lacquer coating with a melamine foil.

It has been significantly cheaper than the wood-finish version ever since. In the U.S., the model that measures roughly 6½ feet tall and 2½ feet wide retails at $89.99 in white and $109.99 in wood finish. IKEA executives wanted to make the latter version less expensive, too, said Mr. Samuelsson.

Targeting a cost savings of 25% to 30%, Mr. Samuelsson and his colleagues focused on a solution that IKEA had been developing for years: the replacement of wood veneer with paper foil.

IKEA’s wooden furniture isn’t typically made of solid wood. Instead, it has traditionally used veneer, a thin slice of wood less than a millimetre thick that is glued onto a main structure of particleboard. Particleboard is formed from compacted wood chips and sawdust, and is significantly less expensive and lighter than solid wood.

Mr. Samuelsson knew that getting rid of the costly veneer would be key to savings, he said. The paper foil is less expensive, less wasteful and much quicker to apply than veneer, which speeds up the rate of production, Mr. Samuelsson said. Wrapped around the particleboard structure and printed with wood patterns, it looks like a wooden surface, he said.

IKEA first began to develop paper foil for use on its furniture around 2004, and has since steadily made the material less expensive and more reliable, gradually deploying it on other furniture lines, including the Pax wardrobe, one of the company’s bestselling bedroom closets.

By the time Mr. Samuelsson and his team of a dozen designers set about reworking the Billy in 2020, IKEA leaders had enough confidence in the paper foil to use it on their prize bookcase, he said. The Billy redesign brought some functional changes—including the replacement of metal nails with user-friendly plastic fasteners—but the switch from veneer to foil generated the cost savings that managers had been hoping for, he said.

The global rollout of the reworked version of the bookcase—produced in Sweden, Germany, Slovakia and China—has faced obstacles. Factories in Europe were already running at capacity, so the company would need to move slowly and carefully to introduce the new version without disrupting output. IKEA also realised its demand for paper foil would balloon, which required lengthy preparations to help suppliers build up their output.

Production of the new version started last year in China, where the local manufacturer had spare capacity and could implement the new production system sooner. The Billy is the country’s No. 1 IKEA product. There the wood-style bookcase is priced at 499 yuan, equivalent to about $72, down from 699 yuan—a 29% reduction. The white version sells for 399 yuan. The new Billy hits stores in the U.S. and Europe in early 2024.

These kinds of design changes are unlikely to alienate IKEA consumers, who typically don’t focus on how their furniture is made, said Tom Higgs, a furniture designer and lecturer at London’s Brunel University. “IKEA’s customers are looking for affordable, replaceable and convenient furniture,” he said.

For one of IKEA’s most popular office swivel chairs, the Flintan, smaller armrests and less steel and plastic in the back cut manufacturing costs. The new Flintan, which hit stores in 2021, is roughly the same size as its predecessor, but it’s much more efficient to ship after designers tweaked its components to make them fit more snugly into a flat pack. IKEA can now squeeze 6,900 Flintans into one shipping container, up from 2,750.

Even so, the company said that costs have increased so much that it decided to hold the chair’s price at $119 in the U.S. Without the design tweaks, the price would have risen significantly, it said.

IKEA designers likewise reworked the Säbövik bed, available in Europe but not the U.S., by changing the construction of its wooden frame. It was previously made of so-called sandwich board, comprising thin layers of wood glued together. Designers experimented with new material mixes before settling on a less expensive and lighter combination of solid wood, plywood and a compressed structure of wood strands and glue called oriented strand board.

The Säbövik used to come flat-packed in three cardboard boxes, but now fits into just two more compact boxes, enabling the company to cram twice as many flat-packed beds into a shipping container.

Tasked with developing a new extendible dining table that wouldn’t be prohibitively expensive, IKEA designers tried a novel approach.

Earlier IKEA tables typically used solid wood legs for strength and stability. In developing the new Rönninge table, which launched last year, designers created a leg made from hollow wood veneer with solid-wood inserts at the top and bottom to add strength. This approach significantly reduces material and freight costs since each leg now contains 90% less wood than if it had been made of solid wood, the company said. The Rönninge retails at $499 in the U.S.


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China’s EV Juggernaut Is a Warning for the West

Competitive pressure and creativity have made Chinese-designed and -built electric cars formidable competitors

Thu, Jun 8, 2023 4 min

China rocked the auto world twice this year. First, its electric vehicles stunned Western rivals at the Shanghai auto show with their quality, features and price. Then came reports that in the first quarter of 2023 it dethroned Japan as the world’s largest auto exporter.

How is China in contention to lead the world’s most lucrative and prestigious consumer goods market, one long dominated by American, European, Japanese and South Korean nameplates? The answer is a unique combination of industrial policy, protectionism and homegrown competitive dynamism. Western policy makers and business leaders are better prepared for the first two than the third.

Start with industrial policy—the use of government resources to help favoured sectors. China has practiced industrial policy for decades. While it’s finding increased favour even in the U.S., the concept remains controversial. Governments have a poor record of identifying winning technologies and often end up subsidising inferior and wasteful capacity, including in China.

But in the case of EVs, Chinese industrial policy had a couple of things going for it. First, governments around the world saw climate change as an enduring threat that would require decade-long interventions to transition away from fossil fuels. China bet correctly that in transportation, the transition would favour electric vehicles.

In 2009, China started handing out generous subsidies to buyers of EVs. Public procurement of taxis and buses was targeted to electric vehicles, rechargers were subsidised, and provincial governments stumped up capital for lithium mining and refining for EV batteries. In 2020 NIO, at the time an aspiring challenger to Tesla, avoided bankruptcy thanks to a government-led bailout.

While industrial policy guaranteed a demand for EVs, protectionism ensured those EVs would be made in China, by Chinese companies. To qualify for subsidies, cars had to be domestically made, although foreign brands did qualify. They also had to have batteries made by Chinese companies, giving Chinese national champions like Contemporary Amperex Technology and BYD an advantage over then-market leaders from Japan and South Korea.

To sell in China, foreign automakers had to abide by conditions intended to upgrade the local industry’s skills. State-owned Guangzhou Automobile Group developed the manufacturing know-how necessary to become a player in EVs thanks to joint ventures with Toyota and Honda, said Gregor Sebastian, an analyst at Germany’s Mercator Institute for China Studies.

Despite all that government support, sales of EVs remained weak until 2019, when China let Tesla open a wholly owned factory in Shanghai. “It took this catalyst…to boost interest and increase the level of competitiveness of the local Chinese makers,” said Tu Le, managing director of Sino Auto Insights, a research service specialising in the Chinese auto industry.

Back in 2011 Pony Ma, the founder of Tencent, explained what set Chinese capitalism apart from its American counterpart. “In America, when you bring an idea to market you usually have several months before competition pops up, allowing you to capture significant market share,” he said, according to Fast Company, a technology magazine. “In China, you can have hundreds of competitors within the first hours of going live. Ideas are not important in China—execution is.”

Thanks to that competition and focus on execution, the EV industry went from a niche industrial-policy project to a sprawling ecosystem of predominantly private companies. Much of this happened below the Western radar while China was cut off from the world because of Covid-19 restrictions.

When Western auto executives flew in for April’s Shanghai auto show, “they saw a sea of green plates, a sea of Chinese brands,” said Le, referring to the green license plates assigned to clean-energy vehicles in China. “They hear the sounds of the door closing, sit inside and look at the quality of the materials, the fabric or the plastic on the console, that’s the other holy s— moment—they’ve caught up to us.”

Manufacturers of gasoline cars are product-oriented, whereas EV manufacturers, like tech companies, are user-oriented, Le said. Chinese EVs feature at least two, often three, display screens, one suitable for watching movies from the back seat, multiple lidars (laser-based sensors) for driver assistance, and even a microphone for karaoke (quickly copied by Tesla). Meanwhile, Chinese suppliers such as CATL have gone from laggard to leader.

Chinese dominance of EVs isn’t preordained. The low barriers to entry exploited by Chinese brands also open the door to future non-Chinese competitors. Nor does China’s success in EVs necessarily translate to other sectors where industrial policy matters less and creativity, privacy and deeply woven technological capability—such as software, cloud computing and semiconductors—matter more.

Still, the threat to Western auto market share posed by Chinese EVs is one for which Western policy makers have no obvious answer. “You can shut off your own market and to a certain extent that will shield production for your domestic needs,” said Sebastian. “The question really is, what are you going to do for the global south, countries that are still very happily trading with China?”

Western companies themselves are likely to respond by deepening their presence in China—not to sell cars, but for proximity to the most sophisticated customers and suppliers. Jörg Wuttke, the past president of the European Union Chamber of Commerce in China, calls China a “fitness centre.” Even as conditions there become steadily more difficult, Western multinationals “have to be there. It keeps you fit.”


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