Companies

34 plant shutdowns reveal Kenya manufacturing woes

Thursday October 12 2023

More than 30 Manufacturing companies have shut down production plants in Kenya in under a decade, revealing the impact of an uncompetitive tax and business environment and cheaper imports on the local industry.

A dozen other firms significantly downsized operations to stay afloat, according to an analysis of the Sector data between 2014 and 2022 which largely focuses on large factories with established distribution channels.

The statistics shines spotlight on the dwindling competitiveness of the sector whose success is key to helping Kenya reverse the stubbornly rising unemployment among growing skilled youth in Kenya. This is because the sector has one of the highest if not the highest, multiplier effect on the economy, including the creation of jobs.

The sector’s struggles in part explain the thinning of decent job opportunities for tens of thousands of skilled youth graduating from universities and colleges annually. Although the Kenya Association of Manufacturers, the sector lobby, says a few of the factories may have been resuscitated through acquisitions and bailouts, the impact on the economy has been “detrimental”.

“From the feedback shared with the association [KAM], the main reason for the closure and scaling down has been general business challenges majorly fuelled by taxation, increased cost of power, ease and cost of doing business and unhealthy competition from imported finished goods. For instance, the high cost of power has detrimental effects on the economy because it renders Kenya uncompetitive against other African countries,” KAM chief executive Antony Mwangi told the Business Daily.

“It is critical to also note that our industrial policy shift every year with the Finance Act fosters unpredictability to investors compared to other countries where fiscal policy is predictable.”

Kenya has one of the costliest electricity for factories among its regional peers at a time when Africa has emerged as the likeliest destination for American companies seeking to relocate or diversify out of China.

US manufacturers operating in China are escalating decade-long plans to relocate production lines after being rattled by recent supply chain disruptions due to the Covid-19 curbs amid elevated trade tensions between the two world’s largest economies.

Kenyan manufacturers say on average they pay about Sh25 ($0.17) per kilowatt-hour, nearly five times more than the average $0.03 per unit in Egypt and Ethiopia, and also significantly higher than South Africa’s $0.07, according to analysis earlier in the year.

Kenya’s power supply, however, ranks favourably on reliability.

The sub-sectors that have been hit hardest by the shutdown of factories or/and the scaling down of production capacity are those in food and beverages, automotive, metal and allied, textiles and apparel, leather, plastics and paper space, according to KAM.

The country, which was a favourable location for regional production by some of the world’s leading multinationals on the continent, has seen a number of giant manufacturers close plants in the review period.

These include Procter & Gamble, Reckitt & Benkiser, Colgate Palmolive, Cadbury, Johnson & Johnson, Eveready and GlaxoSmithKline (GSK) which have instead adopted a distribution model. This means they produce goods in “low-cost manufacturing” countries such as Egypt and then supply Kenya through a third party.

Read: Manufacturers’ costs dilemma

The wave of closure of production lines has also swept across domestic firms in under a decade, many citing unhealthy competition from imports largely from China and India, financial difficulties and regulatory overreach.

Some of the causalities include Yana Tyres manufacturer Sameer Africa, Athi River Mining, TSS Grain Millers, Flora Printers, Packaging Manufacturers, Avon Rubber, Spring Industries Ltd, Mash Bodybuilders, Flower City Ltd, Softa Bottling Company, Shiv Enterprises and Munyiri Special Honey.

Those that have scaled down operations include Alpha Fine Food Ltd, General Printers Ltd, Pride Industries, Tropical Sawmill Ltd and Brollo Kenya.

Successive governments have failed to adequately address the competitiveness of Kenya’s manufacturing sector, with the situation worsening in the aftermath of the World Bank and International Monetary Fund-led market liberalisation policies of the 1990s through structural adjustment programmes.

The low competitiveness of the Kenyan industries has been partly blamed for the proliferation of basic products such as toothpicks from other countries, taking away jobs which could be supporting local households.

The struggle for the sector is reflected in the measly 0.95 percent average growth in wage employment in five years through 2022 when total headcount for private factories was estimated at 329,600.

“Manufacturing has the potential to create high-quality jobs and increase the standards of living in a country. Therefore, a weak manufacturing sector denies the country of much-needed jobs and revenue,” said Ken Gichinga, chief economist at Mentoria Economics.

“Creating a low-cost manufacturing base can propel Kenya’s industrial goals. This can be achieved by reviewing and creating a competitive tax policy that complements all the factors of production.”

President William Ruto, just like his predecessors, has placed manufacturing at the top of his Bottom-Up Economic Transformation Agenda which is “geared towards economic turnaround and inclusive growth”.

The Ruto administration has pledged to institute policies which will raise the manufacturing sector’s contribution to the gross domestic product — a measure of national economic output— from 7.8 percent in 2022 to 20 percent by 2030.

Dr Ruto’s ‘Kenya Manufacturing Agenda 20 by 30’ aims at maximising “on opportunities available to spur local industry’s growth”.

“In the next five years, I want it to be at 15 percent [and] by 2030 I want manufacturing as a percentage of our GDP to be at 20 percent. That is the trajectory I want us to go,” Dr Ruto told the last joint media session in May.

“In this budget [for the current financial year which started in July], we have imposed [higher] taxes … on imported fish, furniture, steel, cement [et cetera] because we want to grow our own manufacturing capacity. By growing our own manufacturing capacity, we grow jobs.”

The performance of the sector has, however, stuttered in the first half of the year, growing a measly 2.0 percent and 1.5 percent year-on-year in the first and second quarters, respectively, multi-year lows, excluding the pandemic year.

Growth in the sector, which largely relies on foreign markets for supplies, has largely buckled under pressure from elevated inflation and the depreciating shilling which have raised the cost of production.

Resultant higher input costs have raised product costs and hurt consumer demand at a time when household earnings have been squeezed.

“For us, our biggest worry is the exchange rate. If the exchange rate depreciates by 35 percent, my cost goes up by 35 percent. If my cost goes up by 35 percent, I have to increase my selling price by 35 percent which is not possible for consumer to accept those prices because purchasing power is already very low and consumers are struggling,” said Fouad Hayel Saeed, the chairman of the Malysia-based PIL Group, which owns Golden Africa Kenya Ltd, the makers Avena and Pika vegetable oil and bar soap brands Zenta and Saba. Mr Saeed spoke when he visited Nairobi in July.

The Kenya Kwanza’s target for the manufacturing sector appears overly ambitious given that the past regime failed by far to achieve the 15 percent share of GDP for the manufacturing sector.

The Uhuru Kenyatta regime, in which Dr Ruto served as Deputy President until his powers were clipped in 2019, had pledged to pursue an export-oriented manufacturing agenda with a focus on value-addition to farm produce.

Read: Treasury doubles budget to jump-start manufacturing

“I am very positive about the future, especially with the initiatives taken by the President, including the recent roadshow in the US. It is all about what we can do in Kenya so that people can come and invest,” said Panjak Bedi, the founder and chairman of United Aryan Ltd, an apparel manufacturing firm.

Dr Ruto in September joined the months-long Kenya roadshow in the US, which sought to market Kenya as the manufacturing hub for American firms looking for new low-cost production bases.

The Kenyan leader made a case for Kenya’s business and investment potential in technology during the meeting in San Francisco which was attended by officials from tech giants, including Microsoft, Cisco, IBM, Kyosk and SunCulture.

The roadshow was launched on April 25 in New York City with a focus on attracting investors into apparel sector, moved to Chicago on September 13 to scout for investors in agri-business before proceeding to San Francisco from September 15.

“Those initiatives [in the US] will start bearing fruits in two to three years and we will create different kinds of jobs not just in manufacturing, but services, agriculture and others,” Mr Bedi told the Business Daily. “I feel Kenya has huge potential because the biggest asset which we have, but don’t recognise here, is our human capital. Our human capital is superb, the workmanship is good and work ethic compared with many countries is great. People are very ready and eager to work. It is for us to bring in business and provide raw materials to work.”

The Ruto administration has adopted a value chain approach to propel the sector to the targeted levels in terms of contribution to the economic output.

The National Treasury in 2023 Budget Policy Statement has identified leather and leather products, building and construction materials, garments and textiles, dairy products, edible and crop oils and the tea sub-sector as the value chains which will place the sector onto a sustainable growth path.

“Our global competitiveness should be addressed very, very seriously. Otherwise, under AfCFTA [African Continental Free Trade Area], we will have neighbouring countries coming and dumping goods in Kenya,” Mr Bedi said. “We want our manufactured goods to be exported to Africa and globally to Europe and US where we have duty-free access.”

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