Ikea will close its only North American production facility at the end of 2019, the company announced earlier this month. The Swedish furniture giant’s Danville, Va., plant currently employs a workforce of more than 300 people. Since coming online in 2008, the Danville factory has played a prominent role in Ikea’s supply chain, particularly in wood-based products like shelves. The move raised eyebrows given the emphasis President Donald Trump has placed on job creation in the U.S. manufacturing sector since his election in 2016.
A Business Decision
Ikea, which generated over $43.5 billion in revenue last year, cited a lack of cost competitiveness for the plant’s closure. “We made every effort to improve and maintain the competitiveness of this plant, but unfortunately the right cost conditions are not in place to continue production in Danville, Va., for the long-term,” said Bert Eades, the plant’s manager, in an interview with the Wall Street Journal. Even more specifically, the company said it would be able to bring its products to the North American market more cheaply once it shifts production to Europe.
The irony of this reasoning surely won’t be lost on U.S. trade officials, as the implication is that manufacturing costs in Europe plus trans-Atlantic shipping rates will be lower than the cost of just making the furniture in the U.S. Raw material costs are significantly higher in the U.S., Ikea told the Wall Street Journal.
Disproportionate Impacts
As often occurs with large factory closures, the impact to the area surrounding the facility will be greater than it will to the company itself. Ikea has around 160,000 employees worldwide, which means the Danville plant represents just under one-fifth of 1percent of its total workforce. What’s more, its production footprint is geographically diverse, scattered throughout Europe, Russia and China.
Danville, on the other hand, stands to lose around $500,000 in annual tax revenue with the furniture maker’s departure. Still, city officials say they got their money’s worth out of the deal that brought Ikea to town over a decade ago. They also indicated that they weren’t prepared to offer Ikea additional incentives to stick around because raw material costs figured so prominently in the company’s justification for the closure. Those input costs will surely be something to keep an eye on as domestic manufacturing again heats up as a topic in the 2020 U.S.election cycle.