IKEA is planning to move its production base to Turkey to manage the ongoing challenges with global supply chains and increased shipping costs.
The company plans to manufacture and export a variety of products out of Turkey, including armchairs, bookcases, wardrobes and kitchen cabinets. These products are currently manufactured in various markets, ranging from east Asia and the Middle East to various European countries.
“Due to shipment problems we faced during the (Covid) pandemic, we are attempting to have more manufacturing in Turkey,” Chief Financial Officer Kerim Nisel told Reuters.
“We all saw in the pandemic that diversification is so important,” Nisel said. “It might not be a good strategy to produce items in one country and then try to transport them all around the world.”
While Nisel declined to reveal how much of the company’s overall production will be moved to Turkey, IKEA currently exports three times as much as it imports into the country. Some of the products the company currently makes in the country include ceramics, glass, textile and metal products.
The Swedish furniture giant’s move to boost its production capacity in Turkey is likely to yield significant cost savings. According to Nisel, the cost of an outbound container from east Asia has increased from $2000 per unit in a pre-pandemic environment to $12,000 today.
“It is more rational to have them manufactured closer where they are sold. That’s why we want to have them manufactured in Turkey,” he added.
The company will also benefit from Turkey’s geographic location, which serves as the corridor connecting western countries with the Asian market.
“Turkey, with its strategic location, has posed a strong alternative to pre-Covid era’s single-centered and Asian-based production network,” Turkey’s Vice President Fuat Oktay said.
That being said, the company is expecting to face financial headwinds, with the Turkish lira seeing significant fluctuation in its value. The currency reportedly fell to a record low on Wednesday. Meanwhile, interest rates continue to be high, which are in turn adding financing costs for investors.
“It is really difficult to hedge FX positions when interest rates are above 20 percent,” Nisel said, adding that IKEA is relying on three to six-month hedging contracts to offset currency volatility.
IKEA is far from the only company that is rethinking its production strategy. Various other European brands such as Benetton are moving their production bases closer to their home markets in countries such as Croatia, Egypt, Serbia, Tunisia and Turkey, with the goal of reducing production in Asia to half.