Fakes, high energy costs push manufacturers out of Kenya
What you need to know:
Manufacturers in the region lose over $330 million annually due to counterfeit products, and the government loses $67 million in potential tax revenue.
It is estimated that manufacturing companies have lost 70 per cent of their market share in East Africa to bogus products.
Egypt clamps down on cheap imports, allowing local manufacturers to produce significant volumes and enjoy economies of scale.
In the past week, two large Kenyan manufacturers have announced plans to shut down their plants and shift operations to Egypt. In both cases, counterfeits and cheap imports have been blamed for the closures.
Two weeks ago, Cadbury Kenya announced that it will close down its manufacturing plant in Nairobi by the end of October.
Navisha Bechan-Sewkuran, Cadbury’s corporate and government affairs lead for Southern, Central and Eastern Africa, said the move is part of a global transformation strategy to reinvent its supply chain after suffering unfair competition from imports.
“We have only stopped the manufacturing segment, but we will still remain active in the marketing and distribution functions. We have resorted to importing our products from Egypt so that we can achieve our objective of doubling our business in Kenya in the next three years,” Ms Bechan-Sewkuran said.
To achieve this, Cadbury says that it plans to invest substantially in its marketing and distribution network to reach more consumers. This move is also seen as a way to take on imported products that have led to the depletion of market share and decrease in profit margins.
In 2011, a surge in the importation of cheap products by leading retail outlets subjected locally produced chocolates to unfair competition. Cadbury Kenya could not justify continued local production, and the company resorted to importing Cadbury chocolate from South Africa.
Eveready East Africa has also been negatively affected by cheap imports and counterfeits. In the same week as Cadbury, the company announced the closure of its Nakuru-based manufacturing plant citing competition from cheap imports that are not charged any tax, making it difficult to provide a level playing field.
In the full-year to September 2013 results, Eveready’s net profit fell 58.7 per cent to $493,237, from $784,783 the previous year. Its production capacity dropped to 50 million units annually, down from a previous high of 180 million per year.
Eveready managing director Jackson Mutua said they have chosen to import from Energiser in Egypt because power costs are lower there.
“Most Egyptian firms enjoy low production costs due to lower power and labour costs. It makes business sense to import these products and sell them locally instead of manufacturing them here,” Mr Mutua said.
Manufacturers in the region lose over $330 million annually due to counterfeit products, and the government loses $67 million in potential tax revenue. It is estimated that manufacturing companies have lost 70 per cent of their market share in East Africa to bogus products.
The East Africa Chamber of Commerce chief executive officer, Charles Kahuthu, says that counterfeiting is a problem that requires a tough approach from regional governments because it is choking local manufacturers.
“It’s unfortunate for manufacturing firms and investors to close shop after incurring millions of shillings in losses due to counterfeit products. The regional governments should not allow counterfeits to drive genuine manufacturers out of business because it undermines growth and job creation. It is up to the region’s tax administrators and anti-counterfeit departments to put an end to this,” Mr Kahuthu said.
Egypt clamps down on cheap imports, allowing local manufacturers to produce significant volumes and enjoy economies of scale.
Last year, the Kenya Association of Manufacturers (KAM) raised concern over a tax regime that seems to favour foreign businesses. KAM said imports from Egypt, which are zero-rated, have effectively priced locally manufactured goods out of the market.
In addition to import duty, Kenyan manufacturers have to contend with a higher cost of power than their counterparts on the continent.
On average, Kenyan manufacturers pay $0.21 per kilowatt hour (KWh) of electricity; Egypt’s manufacturers pay an average of $0.03 and South Africans pay $0.05.
Reckitt Benckiser, Procter & Gamble, Bridgestone, Colgate Palmolive, Johnson & Johnson and Unilever are among the firms that have either relocated from Kenya or restructured operations blaming high production costs.
Consumers in Uganda and Tanzania pay $0.11 and $0.07 per kilowatt of electricity respectively.
In May, Kenya Power through the Energy Regulatory Commission announced an increase in the fuel charge from $0.06 to $0.08 per unit due to increased thermal generation.
According to ERC, Kenya’s heavy reliance on diesel-powered generators to produce electricity, due to low water levels in the country’s hydroelectric dam, has been blamed for the rise in the fuel adjustment costs.
Electricity charges for big domestic consumers have been rising since December, after Kenya Power raised the consumption charge for commercial users by over 30 per cent. After December’s review of tariffs, consumers of more than 200 Kwh paid $0.04 more per unit.
Betty Maina, the chief executive officer of the Kenya Association of Manufacturers, said Kenya’s competitiveness on the global market has been declining due to the high cost of production.
“We are seeing a web of laws and regulations, administrative procedures, poor labour productivity, poor infrastructure and high energy costs that constitute a challenge to Kenya’s efforts to remain competitive,” Ms Maina said.
In the World Bank’s 2014 Ease of Doing Business report on Kenya, it came out clearly that despite improvements within the East African Community, Kenya has been losing its competitive edge to countries such as Egypt, Rwanda and South Africa.
“Manufacturing had been growing at 13 per cent, but in recent times this has gone down to 10 per cent; expansion in the sector has been constrained by energy costs. We need to lower the costs of energy so that we can achieve a more feasible industrialisation,” Ms Maina said.
Last month, in a meeting with the Cabinet Secretary for Energy and Petroleum Davis Chirchir, KAM chairman Pradeep Paunrana called for reliable power supply to boost productivity.
“Power supply continues to be erratic, and this is negatively affecting the productivity of the manufacturing sector,” said Mr Paunrana.
