Malaysia’s Furniture Exporter Banks on RM900m Ikea Deal

Every time furniture giant Ikea sells an Ensta or Jokkmokk dining set in Malaysia, Datuk Kimble Yao hears cash registers ring.

One in three pine dining sets Ikea Damansara sells in its Petaling Jaya store is made in Kimble Furniture Corp Bhd’s 10-hectare factory in Bukit Rambai, Malacca.

And he is banking on the company improving profit with an impending RM900 million contract to supply the Swedish group more of such sets over the next three years.

 Ikea, which owns 250 stores worldwide, is due to place purchase orders worth e200 million (RM912 million) for bedroom and dining furniture, said Yao, the company’s managing director and founder.

 Malaysia’s fourth largest furniture exporter, Kimble Furniture will be signing a memorandum of understanding (MOU) with its European client at the end of this month, he said.

Kimble Furniture’s operational profit fell 27 per cent last year to just over RM9 million. Net profit plunged to just under RM900,000 from RM5.2 million, due to trade financing costs which more than doubled.
This year, the company could see a net profit of RM7.2 million, according to a note by TA Securities made available to the Business Times.

Since Ikea rang up cumulative sales of 3.5 billion euros (RM15.96 billion) in 2006 worldwide, (outside Europe), “we foresee excellent potential for Kimble Furniture to secure more orders as one of Ikea’s vendors in South-East Asia,” it said.

Yao said by the end of the year, its exports to Europe would swell by 55 per cent to RM351.4 million, most of them going to Ikea. The Swedish group is Kimble Furniture’s largest client on retainer in medium to low range pine wood furniture.

“At the moment, about 30 per cent of pine furniture sold in Ikea Malaysia is produced by Kimble Furniture Corp Bhd,” he said.

“We know that Ikea is a fast- growing European furniture chain and has stores not only in Europe, but in the North America, Middle East, and the Asia- Pacific region as well.

“We have been dealing with Ikea since 1991 and the MOU will increase our business worth,” said the managing director.

Kimble Furniture imports wood and timber, including pine, to make dining and bedroom sets for export to the US and European markets.

Yao began supplying Ikea furniture in the 1980s through another company, Ta Wu Wood Enterprise, but lost the business when Ikea changed its sourcing policy. Last year, Ikea put in an order for RM15 million worth of dining sets.

“Ikea is fast-growing and needs more furniture supply. It trusts our ability to help mass produce quality products. That is why we managed to stay as its vendor,” he said.

Ikea’s orders are expected to reduce the company’s dependence on the US market, which contributes about 60 per cent to its revenue currently, he said.

“The US currency is weakening and material costs are increasing in Malaysia. There is no way we could compete with the price offered by Vietnam and China in the current American market,” he added.

 TA Securities estimated that every 1 per cent rise in the Ringgit against the US dollar would mean a 0.9 per cent drop in Kimble Furniture’s sales.

In addition, competition in the American segment is driving Kimble Furniture to consider going downstream. It is planning to acquire a furniture chain with 70 stores in the North American region.

“We are in the process of negotiating,” said Yao.
He declined to reveal the name of the chain, but expects the acquisition to cost about US$30 million (RM101 million). He also expects the acquisition to be completed next year, bringing in an annual revenue of US$370 million.

“Our factory in Bukit Rambai, Malacca, will remain as the production base,” said Yao.