Cheap imports, high power costs pushing manufacturers out of Kenya

Early this month, leading tyre maker Sameer Africa joined Cadbury and Eveready in closing its factory in Kenya.

The firm said in a statement that the move was a result of high energy costs, cheap imports from India and China and a reduction in Customs duties under the five-nation East African Community’s Common External Tariff.

“The board of directors resolved to stop the manufacturing of tyres and allied products at the Sameer Africa plant in Nairobi and to commence offshore production by tyre manufacturers domiciled in China and India,” the company said in the note to the Capital Markets Authority.

Two years ago, Eveready chose to import dry cells from Egypt in a bid to compete with cheap imports from China while Cadbury decamped to South Africa in October 2014.

Mondelçz International, the US-based parent company of Cadbury Kenya, said the move would allow it to focus its resources on scale manufacturing facilities where it can generate greater efficiencies, to reinvest in growth.

READ: Fakes, high energy costs push manufacturers out of Kenya

Other manufacturers that have closed down production lines in the country are Procter & Gamble, Reckitt Benckiser, Johnson & Johnson, Bridgestone, Unilever and Colgate Palmolive — with most of them either leaving for Egypt or South Africa.

Experts believe that the government has done little to reduce the country’s appetite for cheap imports from Asia. Data from the Kenya National Bureau of Statistics (KNBS) shows that Kenya has imported goods worth $1.2 billion in the six months to June this year, with India as the second biggest source market for Kenyan imports at $944 million.

The Kenya Economic Report launched in Nairobi recently by the Kenya Institute for Public Policy Research and Analysis (Kippra) shows that the manufacturing sector is facing stiff competition from Ethiopia and the sector’s contributions to GDP have been gradually declining in the past three years.

According to the report by Kippra, while the manufacturing sector grew to $4.3 billion from $4.1 billion in 2014, its contributions to GDP and employment are declining marginally. Export of the country’s manufactured goods fell by 20.3 per cent last year, with growth declining to 3.6 per cent, down from 5.6 per cent two years ago.

“The sector’s contributions to GDP and employment are declining as a result of both internal and external factors. Key challenges include high production costs and competition from cheap imports, especially from China and India,” said the report.

Permanent Secretary in the State Department of Planning Saitoti Torome said the country risks being overtaken by Ethiopia and its goods becoming less competitive due to lack of investments in the manufacturing sector.

READ: Ethiopia wins big as cement, flower, shoe firms set up shop

World Bank lead economist for Kenya Apurva Sanghi sees de-industrialisation becoming a reality soon.

“Because Kenya produces and trades few intermediate goods, researchers suggest that Chinese imports could lead to de-industrialisation,” said Mr Sanghi.

In September last year, Kenya’s Industrialisation Minister Adan Mohammed launched a roadmap that targets export markets through the creation of agro-processing hubs, industrial parks and special economic zones, in order to expand its basket of finished products.

READ: Industrial parks spreading across region, with eye on economic growth

Developed by Mckinsey, the plan also seeks to secure a top 50 position in the Ease of Doing Business Index; increase manufacturing’s contribution to over 15 per cent of GDP; create one million jobs and increase foreign direct investment to $5 billion by 2025.

The country’s high energy costs have been cited by the Kenya Association of Manufactures as contributing to high production costs. Industrial power costs, stand at an average of $0.17kWh compared with Tanzania’s $0.12; Egypt’s $0.11; Ethiopia’s $0.09 and South Africa’s $0.06.