Manufacturing nightmare that is turning Kenya into graveyard for companies

More than 200 employees of Tata Chemicals woke up to the shocking news that they would be rendered jobless.

Their employer had made the painful decision to stop production at its soda ash plant in Magadi in early 2014.

They had just become victims of high energy costs and a soaring debt burden that even Tata Chemicals, the world’s second-largest soda ash maker, could not contain.

The same fate is now awaiting about 700 employees of Kenya Fluorspar in a month’s time when the Kerio Valley-based firm puts a padlock on its doors.

Kenya Fluorspar’s managing director, Nico Spangenberg, said the firm will suspend its operations indefinitely on April 30.

“This announcement will unfortunately result in the termination of the employment of employees across all levels of staff. All agreements will be respected and wages and dues paid in full,” Mr Spangenberg said in an announcement last week.

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The slump in global steel prices has seeped into the local production industry in Kenya, and there will soon be fewer metals getting hit in Nairobi’s Industrial Area.

The drop in prices caused an oversupply of the commodity that forced even the biggest of steel manufacturers in China and Brazil to slow down productions.

But unlike developed countries, Kenya is yet to come up with significant buffers to cushion local manufactures from total collapse.

The taxman has already raised the alarm that there will be a softening in tax collection and massive job losses in the sector after global steel prices dropped to their lowest levels in over a decade towards the end of last year.

“I was in a meeting recently with some players in the steel industry who told me that the industry had shed 18,000 jobs,” Kenya Revenue Authority (KRA) Commissioner General John Njiraini said in an earlier interview.

The story has been on replay the last five years, preventing Kenya’s manufacturing sector from moving out of the infancy stage.

Fluorspar joins a growing list of companies that have stopped manufacturing altogether, or shifted their production plants to neigbouring countries as Kenya drags its feet in fixing the challenges in the sector.

Other firms affected include Eveready East Africa, which suffered from floods of cheaper imports, as well as a lack of innovation. It reduced its workforce by more than 300 employees and shut down its Nakuru plant last year.

Colgate Palmolive, Reckitt Benckiser, Cadbury Kenya, Bridgestone, Devki Steel and Procter & Gamble have also shifted their bases.

Devki Steel closed its plants in the country in what saw at least 2,000 employees rendered jobless.

The exits come at a time when the value of Kenya’s manufacturing sector has stagnated at 10 per cent of the country’s GDP for at least 10 years. Industrial exports had also decreased in absolute terms for much of this decade, until last year when there was some relief.

Cheap imports

The Kenya Manufacturing Association (KAM), whose complaints have started to attract Government attention, attributes the exits to a host of factors, among them the high costs of production and the local market being flooded with cheap imports.

“We are a country that imports two times as much as we export our goods and services,” KAM CEO Phyllis Wakiaga told Business Beat.

The association added that the sector is also battling poor infrastructure and market access.

“These need immediate intervention if we are to attract investors to our country. For example, it still takes 16 days for exporters from Kenya to access the Tanzania market as the movement of goods is curtailed by poor infrastructure and slow and cumbersome administrative processes at transit points,” Ms Wakiaga said.

“In the same breath, even local markets are becoming more difficult to navigate due to factors brought about by devolution, in particular, the introduction of a multiple charges regime.

“It has become very costly to trade across county borders due to the introduction of multiple levies and charges. This is where the shoe pinches for the local manufacturer, and major reforms in this area are required.”

Manufactures also decry other operational costs, among them labour, rent and other overheads. This, coupled with the high cost of capital, is discouraging investment in critical areas, for example, setting up manufacturing plants or SME growth.

KAM said there is also the issue of unfair competition from counterfeit products, tax avoidance, illicit imports and dumping.

It argues that these create a hostile environment for doing business for interested investors.

Additionally, there is a deficiency of skills and capabilities in sub-sectors that have great growth potential, such as the production of quality leather products, engineers for key sectors and SME know-how (including access to market and credit).

What is worse is that more than half of Kenya’s exports are related to agriculture — including tea, horticulture and coffee — but not much of value addition is happening.

Price premium

Tea is a staple of Kenya’s exports, bringing in Sh100 billion annually. However, 97 per cent of the product is exported in bulk form.

Yet, Kenya could attract a 50 to 100 per cent price premium by promoting ‘Made in Kenya’ brands internationally, attracting Sh20.4 billion in value addition and creating 10,000 jobs.

Further, only 16 per cent of all exported agricultural output in Kenya is processed. The rest is exported in raw form. In contrast, Tanzania processes 27 per cent of its produce, Uganda 34 per cent and Ivory Coast 32 per cent.

The country can double processed exports to boost agriculture, create an additional 110,000 jobs and earn Sh61 billion.

The Economic Survey 2015 captures additional effects of the challenges in the sector. For instance, the production of meat and meat products in 2014 registered a drop on account of reduced quantities of beef, mutton and pork.

Over the same period, production of processed and preserved fish rose by 2 per cent, a marginal increase given the billions of shillings that have been sunk into the industry. Production of prepared and preserved fruits and vegetables was one of the worst hit, contracting by 14.1 per cent.

“This was as a result of mixed performance in the sub-sectors, with the quantities of prepared and preserved fruits posting a 20.2 per cent depressed output, while canned vegetables expanded by 2.8 per cent,” the survey noted.

But it is not all gloom in the sector.

The Government launched an ambitious plan expected to breathe life into it and generate one million new jobs. However, this plan is coming a little too late for some of the companies that have been forced to exit the market.

The first ever blueprint targeted at reviving manufacturing was launched late last year by Industrialisation Cabinet Secretary Adan Mohamed, and hopes to address some of the sector’s challenges.

If everything goes according to plan, the Government will create an industrial development fund, industrial parks along infrastructure corridors and support agro-processing, textiles and mining, among other sectors.

The plan aims to add between Sh200 billion and Sh300 billion to the economy in the next five years. Actualising the blueprint will require dedicated financing from the Budget.

Mr Mohamed said the country had identified 10 key opportunities that can increase manufacturing sector jobs by 150 per cent to 435,000 in the first five years.

“As an emerging economy, moving from an agriculture-based, low-income economy to an industrial, middle-income economy, it is paramount that the manufacturing share to GDP increases,” the CS said during the launch of the master plan.

The industrial transformation programme will see the development of a food processing hub in Mombasa to process imported agro-based products, such as wheat, palm oil and rice.

Agro-processing zones will also be launched in Kisumu, Meru, Galana, Nakuru and Kwale to process local commodities, such as avocados, mangoes, cassava, peas, passion fruit and potatoes.

A fishing port and fish processing zone will be established in Lamu, and a textile cluster set up in Naivasha to attract anchor investors. The Government will also launch a leather cluster in Machakos and two other locations yet to be identified.

Local content

National construction services champions will also be identified and supported to participate in mega infrastructure projects. The plan will also see the development of a low-cost housing ecosystem with an accessible and affordable environment to support social housing.

The Government plans to develop local content clauses to support local manufacturing sectors, such as the steel industry.

To develop the SME sector, the Government will select 50 enterprises with the highest potential every year in key sectors and support them with credit, training and networking assistance.

It will also offer incentives for local value addition for multinational companies to create opportunities for SMEs. This is expected to attract between Sh20 billion and Sh24 billion in value addition, as well as 10,000 jobs.

At the end of it, the industrial transformation programme aims to increase manufacturing’s contribution to GDP to 15 per cent, create one million jobs, and increase foreign direct investments (FDIs) five-fold. It also plans to get Kenya up the ease of doing business rankings to top 50 by 2020. The country is currently ranked 108th out of 189 nations.

This is the most significant plan the Government has come up with to address the growing import bill that is now hurting the economy by putting pressure on the shilling. Imports have expanded to stand at 40 per cent of GDP; exports are at 15 per cent.

“To boost production and exports, Kenya will work to ease regulations on the sale of exports,” Mohamed said.

The blueprint will also help local firms cash in the growing middle class, which provides a market for finished goods. Currently, this consumer base is served by cheap imports.

The Government further plans to set up an industrial development fund to respond quickly to opportunities in priority areas, as well as accelerate the development of required infrastructure for priority projects.

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