IKEA has said goodbye to Siberian birch

17.09.2010 — Analysis

In 2008, the IKEA group announced its decision to build an industrial complex in the town of Ishim (Tyumen region) to produce unfinished furniture. They then leased 70,000 hectares of forest land, paying 5.6 million rubles for the lot at an auction, plus an additional 18 million rubles for two years' rent. According to Aleksandr Pak, the deputy head of the town of Ishim, during the first stage of the project, they proposed to harvest and do the initial processing of approximately 250,000 cubic meters of timber. Unfinished products would be manufactured and furniture assembled during the project's second stage. Financing for the first stage was estimated at 10 million euros and 50 million euros for the second. Local authorities expected this to create an additional 500 jobs in the town.

For two years the Russian media kept announcing that the Swedish company was just about to start the project. But they never did. Aleksandr Pak claims that the city government was never notified of an official withdrawal, but the authorities were informed that construction would not begin in the near future. City leaders were upset by the suspension of the project. All of the issues surrounding the installation of telecommunication lines had been resolved and the quality of the raw materials (birch) was satisfactory to the investor. Since IKEA did not announce any reason for its decision, officials assume that the overall economic situation in Russia forced the Swedes to take "French leave."

Valery Glazunov, the director of the Ishim Forestry Administration, suggests that the Swedish company was counting on reducing its transportation costs by bringing the production facilities closer to the logging area. But, apparently, the investor then became convinced that it wasn't worth the trouble. There simply isn't enough high-quality birch in Ishim.

Andrei Medintsev, the head of the Forestry Department in the Tyumen region, believes that IKEA overestimated the Russian furniture market, which is having a difficult time. According to his data, furniture sales in the region in 2009 fell by 40-50% in comparison with the previous year. That decline has continued this year - according to the statistics, sales have fallen another 30%. Consequently, demand for unfinished furniture is not growing either.

The market for solid wood furniture in Russia is not well-developed, which is why businesses were not willing to work with IKEA. According to Andrei Medintsev, the Swedish company cannot find a production partner in Russia. Some time ago the IKEA group tried to produce chests of drawers and other articles at the Krasny Oktyabr Woodworking Plant, but the Swedish company occupies a special price niche and it was difficult for the Russians to accommodate their needs.

Olga Kvyatkovskaya, the deputy general director of the Krasny Oktyabr Woodworking Plant, told RusBusinessNews that her company used to produce real wood furniture panels, but stopped. There were several reasons. First, there are not enough raw materials in the Tyumen region that meet the requirements of solid wood furniture manufacturers, and second, there is not enough demand. Manufacturing lumber-core board from real wood is very expensive. It takes three cubic meters of lumber to manufacture one cubic meter of lumber-core board. Prices for raw materials are constantly rising in Russia - for texture paper, resin, and waste wood for making wood chips. Energy is also getting more expensive, and energy-saving measures are not enough to offset the rise in prices. All this is leading to the stagnation or decline of production. Olga Kvyatkovskaya claims that the furniture market is no worse off because of IKEA's decision to suspend construction of the unfinished-furniture plant. If necessary, one can always buy good-quality furniture panels in Omsk. But right now there's no need to - the market is shrinking.

The forest areas that IKEA leased still sit unused. Aleksandr Pak is convinced that the project in Ishim will still happen. Currently, there are negotiations underway with Kazakhstan and Uzbekistan - traditional consumers of Siberian timber. It's true, the entrepreneurs are only willing to manufacture boards. Two major Chinese firms visited, and Valery Glazunov claims that they offered to supply sawmills and dry kilns and to then send the dry boards back to China. But the deal fell through.

Experts note that attempts by the regional authorities to mobilize the production of competitive wood products in Russia have failed. Timber-processing plants are standing idle, the equipment is aging before our eyes, and there is no return on the money that has been invested in production. The few investors who are still trying to realize projects to produce unfinished furniture are focusing solely on the export market. The reason couldn't be simpler. This country is full of poor people who not only can't afford wooden prefabricated houses, they can't even buy solid wood furniture.

The economy is reacting appropriately to the realities of Russian life. According to the statistics, the production of furniture, wool fabric, and rubber and plastic goods in the Tyumen region is declining, but oil and natural gas production is on the upswing.

Vladimir Terletsky