Focus on Local Vehicle Assembly Crucial to Reviving Manufacturing Sector

Growth trends for the last few decades have shown that Kenya’s manufacturing sector remains stunted leading to underutilization of the sector’s potential and the intended impact on the economy.

The significance of manufacturing to any economy in the world cannot be understated. Many economic development success stories owe a great deal to the role of the manufacturing sector. However, the story has been less than impressive in Kenya over the last few decades.

According to the Kenya Association of Manufacturers (KAM), the performance of the manufacturing sector has been weak and has failed to keep up with developments in the region and globally. Its share of the GDP was the same in 2015 as it was in 1965, declining since 2010 to a low of 9.2 percent by 2016. Kenya’s GDP stands at more than 70 billion US dollars. On average, apparently, the manufacturing sector contributes an average of up to 7 billion US dollars of the total GDP, an amount that cannot be overlooked.

Efforts to rejuvenate the industry started with the KAM launching a ten-point agenda for industrialization in 2017. The policy acts as a guide for the government on achieving economic goals stated in its manifesto by directing its efforts on the manufacturing sector.

One of the segments in the manufacturing industry that has for a while been overlooked is the local vehicle assembly. The sector plays a tremendous role in terms of transportation of goods and people, and the formulation of intricate value chains that create employment and business opportunities for thousands of Kenyans.

However, compared to other countries, vehicle assembly in Kenya still has a long way to go, to compete at global levels. Other countries that have invested heavily in local vehicle assembly have realized growth opportunities that are immense with an unquestionable return on investment.

Role of the Government in driving Comprehensive Growth

Through the Big 4 agenda, the government has put the growth of the manufacturing sector first. The initiative is exactly what the local motor vehicle assembly needs to strengthen the country’s manufacturing industry and help achieve better growth through favorable industry regulations and policies.

Examples from other markets where the motor industry has achieved great strides continue to demonstrate that government support is a critical component of their success. New investment laws set by governments have favorably influenced the rise of the automotive industry in some countries.

For instance, foreign car companies setting up shop in Morocco today benefit from a variety of incentives, including a five-year corporate tax holiday, VAT exemptions, and land purchase subsidies.

In measures to attract more investors into the motor vehicle sector, the Kenya government in early 2017 announced a reduced corporate tax rate of 15 percent down from 30 percent for the first five years of operation, for new vehicle assemblers. However, it was not made clear how this measure would apply to existing assemblers, who have already made significant investments in the business.    

Currently, as per the Kenya National Bureau of Standards (KNBS), used cars make up about 80 percent of vehicles imported in Kenya on an annual basis. With such high numbers of second-hand cars, the market for locally assembled vehicles is undermined, constraining its growth.

Ironically, Kenya boasts of three automotive plants capable of assembling 30,000 units per year (on a single shift) but they’re operating at just about 33 percent of their capacity. A policy to discourage the importation of second-hand vehicles will go a long way in achieving beneficial impact on local assembly.

It comes as a relief to note that Kenya’s recently formulated automotive policy framework proposes to impose further age limits on second-hand vehicle imports, from eight to five years.

To demonstrate the effectiveness of this bold policy move, in 2013, Nigeria passed a new tax regulation for second-hand cars to discourage vehicle importation and encourage local production. The Nigerian Government introduced steep tariff rates of up to 70 percent on imported Fully Built Units (FBU), 10 percent on Semi-Knocked-Down Units (SKD) and 0 percent on Completely-Knocked-Down Units (CKD).  

PWC later released a survey titled ‘Africa’s Next Automotive Hub’ that predicted by 2020, Nigeria’s impressive GDP will be the 16th largest economy in Africa and the 9th largest economy by 2050 characterized by a large consumer base with ever-increasing purchasing power driving the demand for locally assembled automobiles.

Tackling the Unemployment Problem

Local vehicle assembly capacity to provide opportunities for skilled and unskilled labor in the country is immense. At full capacity, a local vehicle assembly chain requires a larger number of employees, hired directly, to fully assemble the vehicles compared to the number of manpower required to import second-hand vehicles.

The indirect employment opportunities are also extended through the value chain both downstream and upstream e.g. local vehicle components suppliers and vehicle dealers. Indirect employment includes personnel working in enabling industries, such as vehicle finance and insurance, vehicle repair, vehicle service stations, vehicle maintenance, vehicle and component dealers, drivers, cleaners, which totals to about 60 to 70 percent.

In Thailand, according to a survey of members of the Auto Parts Club and TAMPA, the industry employs more than 500,000 people. In Egypt, it creates 86,000 direct and indirect jobs. In Malaysia, the automotive workforce is also anticipated to increase, with more than 29,000 new jobs expected to be created in 2018 employing more than 755,000 people.

Foreign Direct Investment

Foreign Direct Investment (FDI) is widely believed to be a catalyst that promotes economic development. As many countries compete to attract FDI, it becomes important for the policymakers in the country to understand the effect of FDI on productivity. A robust local vehicle assembly automatically attracts numerous Foreign Direct Investment in the direct or indirect support of the industry.

Through the sixth TICAD conference which took place in 2016 in Nairobi, Japan has looked at mobilizing support for Africa’s socio-economic development underscoring the spirit of “African ownership” and “international partnership”.

Numerous benefits come along with FDI: Job creation, technology transfer to support industrialization, skills training for local youth, manufacture of products suited for the region as well as support for research and innovations.

The local vehicle assembly industry is capital intensive and requires long-term planning on regulatory issues. Thus, a favorable policy regime is critical to driving growth. This industry represents one of the biggest business opportunities over the coming decade that will provide employment opportunities, reduce the wage gap and consequently grow our GDP.

This growth is fundamental to the advancement and expansion of manufacturing in Kenya. Projections are that the auto industry’s flourishing period will take longer than expected. Nonetheless, it’s time the Government awakens the sleeping giant that is motor vehicle assembly sector in Kenya.