Group 5, Ikea Case Study

Hi there! This is the contribution from group 5, explaining the three main IKEA conflicts.

Samara
On March 30th, 2009, the media wrote that IKEA had encountered setbacks in Russia. The department store in Samara had not received their necessary permits from the local authorities and ikea was therefor laying off all of the 245 employees. Ikea themselves say they have had all the necessary permits since December of last year. The city of Samara is regarded an unusually difficult place to establish a company in, because of the bribe situation there.

In April, the failure in Samara was revealed and ikea is threatening to stop all further investments in Russia. The reason given for keeping the store closed is that the building can not handle 30-knot winds says Per Kaufmann, the manager for Ikea in Russia. The official who said that the store must withstand hurricane-force winds also said, “I know of a company, a close friend of mine, who could fix the problem”.

St. Petersburg
IKEA has had problems with the supply of electricity to several of its Russian department stores. Not least, to the Mega Center in St. Petersburg. The official reason for this, was that the power lines could not be drawn from the Russian power company that had monopoly on this, not without bribes, that is. IKEA refused to bribe the Russian power company, so they needed alternative solutions. The solution in St. Petersburg was to hire diesel generators.

The problem was that the company that supplied IKEA with diesel generators, ICM, was controlled by two businessmen a Russian, Konstantin Ponomarev and a Finn, Harri Heikkilä. They both had a dubious reputation in Russia. IKEA claims that one of their own employees, Yuri Volkov, was bribed by ICM to sign the contract. The price of rent and operation was very expensive and the price of diesel was about three times the going rate (the current price), but this was the only an option for IKEA, when the electricity was not working. However, evidence suggests that Heikkilä and Ponomarev persuaded Lenenergo not to give Ikea no electricity at all. And this meant that Ikea was forced to use their diesel generators all the time – with a taximeter that was ticking fast. Ikea’s general manager made an agreement with ICM to pay only 20% of direct costs, and add the rest to a growing debt. The debt was estimated at the end of 2009 to 7 billion.

Moscow
November 2007.
In Moscow, the local governor closed the store for the Christmas season to prevent a traffic problem. Ikea was all of a sudden denied the permission to build a multi-lane access road and a bridge over the highway and it was therefor demolished. After nearly two weeks of negotiations and high monetary losses of the stores, the parties managed to agree. Today, both the accessroad and the bridge is built. The same thing has been apperant almost everywhere where Ikea has set foot in Russia.

Ikea shopping mall Mega Teply Stan in southern Moscow, which is one of Europe’s largest shopping malls. Is one of IKEA’s so-called mega-centers, where the chain both establishes a separate department and are acting as landlords and rent out to others. Ikea now wants to expand the center – but the problem is that it is unclear who owns the land that the center is built on. The dispute has now gone to a Russian court, who shall determine whether Russian property company Machtab is entitled to part of the land or whether Ikea can complete the expansion plan without outside interference.
Expressen says that it came across documents showing that there is a risk that Ikea’s Russian property company loses the dispute, with that comes the risk of losing the mega-buildings constructed on the ground. Expressen argues that the internal documents suggest that Mactabs manager must be identified and disparaged.

Diligence
IKEA’s top managers, with Per Kaufmann at the helm, signed agreements with the Russian generating company ISM, which has become extremely expensive for Ikea. The middle managers at Ikea who warned Kaufmann to sign any contracts, or pointed out their suspicion of corruption, was fired by the personnel department at Ikea Mos (Ikea’s Russian real estate), this shows some internal Ikea Documents that Expressen has access to. The furniture giant is losing 153 million dollars a month since July 1, 2008, when Ikea stopped paying ISM’s invoices for the generators at the Ikea shopping center in St. Petersburg. The Company’s management used the code name Operation Schumacher to stop paying rent to the ISM. In this way, Ikea’s Russian real estate company has built up a hidden debt of seven billion to the ISM. Ingvar Kamprad and the parent holding company Ingka received information as late as in January, 2010 that the debt was so huge. Among other things, a fax circulated in English that warned: “It seems that the middle managers have not reported correctly and completely on the facts. This shows that our problems are internal and that there has been a cover-up “.

August 20th, 2009 Ikea and the diligence met in order to come to an agreement of the mission. According to some secret internal documents the meeting took place in the Dutch Leiden, where Ikea’s head office is located and where Ikea’s general counsel Chris Thordson has his place of work. “The clients wants us to carry out a discreet investigation of the various parties in the ongoing litigation in Moscow,” wrote the diligence of the Agreement. Ikea wanted to know if ISM’s owner Konstantin Ponomarev had contacts with judges, if they are venality and how they will judge. Diligence has also looked into possible criminality and vulnerability of Ikea’s counterpart in the case.

When one of ISM’s demands of Ikea would be examined in a Russian court of appeal, Diligence was informed by a judge: “If I get the instructions to return the case to the tribunal, maybe I can help find a friendly judge in the Court of First Instance.”
Diligence suggested that Ikea would follow a proposed action plan:
Hire a reliable intermediary that the diligence is in contact with, so we can get the case back to the Court of Arbitration. The cost is 350 000 euros, 3.5 million. If the strategy works then the case will be sent back to the tribunal for technical reasons. The amount also covers a basic work to reach a favorable decision of the tribunal of first instance.
Ikea could not follow the action plan because the matter was not sent back to the first instance. But it was a possibility when another of the ISM’s claims would be settled.

End of transmisson.

Best regards,

Group 5

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