A new home supplies store recently opened in Mudanjiang, Northeast China's Heilongjiang Province, and it seems quite like Ikea, both in decoration and the products available. But the store is called Joyme, a new brand that was set up by some of Ikea's former contract manufacturers after an acrimonious split with the giant Swedish firm.

"We could only earn a meager profit by supplying products to Ikea," Song Shihou, chairman of Qing'an Houcheng Wood Ltd based in Heilongjiang Province, told the Global Times.

Song said Ikea had complained about "quality problems" with his products, even though he had been a supplier for them for 13 years. But after Ikea severed its ties with him in January, Song joined an effort to set up a rival firm offering better prices to suppliers.

What caused the split? 

Song claims that Ikea refused to pay for the most recent batch of goods he had sent them, just before the Spring Festival, the most important traditional holiday for Chinese. This meant that Houcheng was unable to pay its employees' salaries and the company had to suspend production.

Song contacted Ikea several times, but reached no agreement over compensation for his losses and the firm still has not resumed production.

Now the company's products for Ikea are piled up in warehouses, and they can't be sold to other buyers because of the Ikea logos on them.

The fundamental reason for the breakup, Song said, is that Ikea had found other suppliers charging lower prices. "Big companies always have greater advantages in negotiations."

Ikea has more than 300 suppliers in China, and "if you're unwilling to work for a low price, there will always be someone else willing to do the job," Song noted.

Heilongjiang Naili Wood Co was another example.

Ikea said that it would assist Naili to set up a new plant in 2006, but when the new plant went into operation in 2007, the price offered by Ikea was lower than Naili's costs, Cao Yuewei, chairman of Naili and former head of the Ikea suppliers' association, told the Global Times.

Naili had to change to production of other goods and it eventually split with Ikea at the beginning of 2011.

The two former suppliers both said that Ikea earns a big profit by constantly reducing the prices paid to suppliers.

"If Ikea wants to reduce a product's price by 5 yuan ($0.79), then the suppliers have to undertake the whole price cut and Ikea bears no loss," Song said.

The price of a product sold at Ikea is often more than twice the price offered to suppliers, he noted.

In an earlier interview with China Business News, Cao said that Ikea paid Naili about 50 yuan per square meter for its window curtains, but they were sold in Ikea for more than 260 yuan per square meter.

However, Ikea offered a different explanation for the split. "Ikea has terminated cooperation with various individual suppliers in China since 2005, and the reason why we broke up with Houcheng and Naili was their failure to provide good-quality products at competitive prices," said Ikea China in an e-mail sent to the Global Times.

The company said that it remains confident about procurement in China and also plans to expand its procurement in the market in the next few years.

Starting a new brand 

Since breaking up with Ikea, Cao and Song have been busy setting up Joyme by cooperating with some other of the company's former suppliers as well as furniture retailers.

"Having worked with Ikea for more than a decade, we are very familiar with them, and will learn from their cost control and quality systems," Cao said.

Another of Joyme's founders, Li Junming, who is the general manager of furniture retailer Kunming Gangdu Furniture Company, admitted that the store decoration and products are somewhat similar to those in Ikea, but he said the company would gradually adjust its product line to local consumers' needs. And this time, suppliers will get a larger share of the profits, he said.

Joyme opened its first store in Mudanjiang on September 16 and launched its online platform 8jiaju.com on the same day.

More stores are being prepared, Cao said, and there are plans to open branches in Tangshan, Xi'an and Kunming within the year.

Meanwhile, Ikea does not seem to be too concerned about this new rival. "China has a huge market for home supplies, and the sector cannot develop without competition," the company said. "We have full confidence in Ikea's development in China and are fully prepared."

Transformation needed

As China's labor costs and raw material costs keep rising, suppliers are facing a challenging time. 

Companies cannot survive as contract manufacturers when a country's economy develops beyond a certain stage, Li Youhuan, a professor at Guangdong Academy of Social Sciences, told the Global Times.

"They must transform themselves according to the market situation, for instance by establishing their own brands," he noted.

Famous multinational brands have strict requirements for products, which could help these contract manufacturers enhance their management and even accumulate R&D experience, Zheng Xueqin, deputy director and chief researcher at China Brand Research Institute, told the Global Times.

Anta and Peak, which were once contract manufacturers for Nike and adidas, are now among the top sportswear brands in China, said Zheng. Television maker Skyworth Group and mobile phone company Gionee also made the leap from being contract manufacturers, he noted.

However, an industry insider at a local furniture chain who wished to remain anonymous said that there is plenty of room in the market for Joyme, especially in third- and fourth-tier cities where Ikea has not yet opened stores.

Ikea's mature procurement model, product design and Swedish lifestyle branding will be hard for newcomers to compete with, he said, noting that there are also risks of rights infringement if the new store sells products for which Ikea owns the design patent. But Li from Joyme was full of confidence. "There will definitely be challenges for contract manufacturers in starting their own brands, but we still have hope," he said.