Why Kenya’s manufacturing is uncompetitive

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Over 50 per cent of Kenyan manufacturers feel the sector is struggling to compete with developed countries with equal pressure coming from regional states, a study has revealed.

This is in the wake of continued high costs of doing business in the country with the local market further being infiltrated by cheap imports mainly from China.

READ:What is hurting manufacturing in Kenya

The study has been unveiled by SYSPRO, a global provider of industry-built Enterprise Resource Planning (ERP) software for manufacturers and distributors, together with Strathmore University.

External factors

In the findings, energy leads as the top factor affecting businesses with a 54 per cent prevalence followed solely by the country’s political climate which accounts for 50 per cent of effect to investments.

The third most toxic factor affecting businesses is taxes with 43 per cent prevalence. Others are cheap imports (40%), exchange rates and raw materials each at 24 per cent, technical skills(17%), climate conditions(13%) , labor wages(13%) while visa requirements accounts for the least of the effects at one per cent.

“Energy was reported as the main external factors that adversely affected business operations, followed by political climate, taxes and cheap imports respectively. Raw materials, technical skills followed closely in terms of impact,” Strathmore University Professor Ismail Ateya noted during the launch of the survey in Nairobi on Wednesday.

He was a principal investigator in the survey which saw close to 100 companies drawn from 12 sectors of the production and manufacturing industry in Kenya interviewed.

It was noted that over 50 per cent of the respondents felt that Kenya’s manufacturing sector would have difficulty competing with counterparts in other developed countries that have advanced education and training systems.

READ ALSO:East African SMES ready to tap into the wider African market

This comes even as manufacturers call for affordable capital financing and tax incentives for technology purchases.

The study explored productivity and competitiveness of the manufacturing sector in Kenya, the role of new technologies in improving the sector and the state of adoption and use of these new technologies.

The challenges add up to a previous finding by the Kenya Institute for Public Policy Research and Analysis (KIPPRA), which revealed lacks of access to an efficient and effective labour force, inadequate infrastructure, political uncertainties, corruption, high cost of power, and poor business environment were affecting businesses in the country.

READ ALSO:Corruption threat to my “Big Four Agenda” President Kenyatta warns

Industries surveyed include food and beverage, energy, electrical and electronics, textile and apparel, timber, wood and furniture, pharmaceutical and medical, building, mining and construction, plastic and rubber, and paper and boards.

Others are metal and allied, chemical and allied, leather and footware, automotive and power.

Operational capacity

It has further been revealed that only about 46 per cent of companies run full eight hours a day while 47 per cent run between six to eight hours.

50 per cent of companies run three to five days a week thus may affect a 24-hour-economy envisioned.

Over 85 per cent of companies interviewed were either semi-automated or fully-automated with a majority still holding on to outdated production units because of high cost of spare parts, unavailability of locally manufactured spare parts and inability to differentiate quality from fake until used.

Counterfeits also remain a hindrance to local purchasing. High software and hardware costs as well as the lack of skilled labor were cited as major hindrances to technology adoption.

Manufacturers interviewed proposed to have tax incentives for technology purchases, better training for local technology partners, improved availability of new technologies locally, availability of affordable automation and robotics technology as well availability of skilled technical workers.

In addressing the issue of affordability for manufacturing software solutions, SYSPRO’s Head of Channel, Pravir Rai said: “keeping IT costs low is very important for businesses particularly SMEs. A lot of software solutions in the market are unaffordable because they come with inbuilt capabilities that a business may not necessarily need at a given time.”

Intervention

The findings, presented at a launch event attended by Kenya’s Principal Secretary, State Department of Investment and Industry in the Ministry of Industry, Trade and Cooperatives Betty Maina, demonstrated that the most important initiatives that can increase competitiveness both for local and export markets (according to the manufacturers interviewed) are favorable taxes and favorable regional preferential treaties.

Other factors included reduction in cost of production, upgrading the current technologies deployed and increasing production efficiency.

“More than half of the manufacturers interviewed feel that the government could still do more to make the sector competitive and attractive to potential investors,’ said Prof. Ismail Ateya, who is the Dean of Research and Innovation at Strathmore University.

Other government incentives needed include development of infrastructure, provision of exemptions, grants and subsidies as well as purchasing guarantee from the government.

Industry players have also called for support for apprenticeship, graduate internships and technical courses in universities, which have been identified as a major initiative that would make local manufacturing an attractive business venture.

Regarding future projections and strategic planning, companies interviewed prioritized product development, advertisement and marketing, computer systems, hardware and software as potential investment areas to improve business operations in the next financial year.

PS Maina has since assured investors of government’s commitment in ensuring growth of the manufacturing sector in the country.

To address the cost of power, the government is keen to have manufacturers get refunds on their electricity bills in a ‘rebate’ plan, aimed at cutting the cost of power by about 30 per cent.

Industry, Trade and Cooperatives CS Peter Munya recently said the plan is awaiting Cabinet approval, having already been agreed upon by the National Treasury, Energy ministry and his office.

“We want to forgive industries definite rebates to bring the cost of doing business down, because we know power is one of the business enablers in industries. A technical report has already been done between my ministry, Treasury and energy, the report has been tabled in the cabinet sub-committee and in a very short time it will find its way to the Cabinet,” Munya said.

The move is the latest by the government as it seeks to ease the cost of doing business in the country, where manufacturers have consistently decried exorbitant electricity bills.

READ ALSO:Kenya ranked among top ten countries in Africa on global competitiveness  

The government seems not to be leaving anything at chance as it pushed for growth of the manufacturing sector, a key pillar in the Big Four Agenda, where it targets to raise its contribution to GDP from the current 8.5 per cent to 15 per cent by 2022.

It also plans to create one million new jobs in the manufacturing sector.

The cost of power which stands at between Sh11 and Sh21 per kilowatt hour, which is on the higher end compared to countries such as Ethiopia, where manufacturers enjoy rates as low as Sh3 per kilowatt hour.

The Kenya Association of Manufacturers (KAM) said the rebate is expected to bring down the cost of energy and make local industries competitive.

Manufacturing growth

Last year, the country’s manufacturing sector expanded by 4.2 per cent compared to a revised growth of 0.5 per cent in 2017, the Economic Survey 2019 indicates, mainly buoyed by increased agro-processing during the review period.

The sector was among drivers of real Gross Domestic Product (GDP), whose growth was 6.3 per cent in 2018, as per the Kenya National Bureau of Statistics (KNBS).

READ ALSO:How Kenya managed to grow its economy by 6.3%

The manufacturing output volume expanded by 5.1 per cent from a revised contraction of 0.8 per cent in 2017. This was mainly on account of increase in production of dairy products, tea, coffee and sugar due to favourable weather conditions.

However, the plastic products, wood and other products of wood, and other non-metallic mineral products subsectors registered declines in the review period.

The government is keen to have the country’s manufacturers secure a sizable market under the African Continental Free Trade Area (AfCFTA) pact which is slowly taking shape with ratification of member states.

READ:AfCFTA timeline starts to count in July

 

 

 

Martin Mwita is a business reporter based in Kenya. He covers equities, capital markets, trade and the East African Cooperation markets.

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