• Local manufacturing's GDP contribution has declined by 10 per cent in a decade
• There is a consensus that the cost of production in Kenya is prohibitively high
There are three pathways to getting rich in Africa. An article in the Star digital edition indicated the three possible pathways: join government, make friends with powerful individuals or get into a joint venture with foreign partners.
As cynical as it sounds, the ongoing saga of China Square once again proves that it pays to have powerful connections. Without political protection, a business can find itself in rather unpredictable circumstances, often with negative outcomes.
China Square launched on January 29 and quickly became a hit with consumers, but it got into trouble because it was perceived to be promoting imported goods. The saga once again brings up the long-running debate between local manufacturing and imported products. While local manufacturing is desirable for economic growth, imported products are often cheaper for consumers.
Trade CS Moses Kuria made it clear that he prefers seeing domestically produced goods in the market. "I will assist China Square owner Mr Cheng to set up a manufacturing plant in Kenya and work on a distribution partnership with Gikomba, Nyamakima, Eastleigh, Kamukunji, Muthurwa and River Road traders," Kuria announced.
THREATENED BY PRICES
Chinese businessman Lei Cheng, the face of China Square, said his competitors feel threatened by the low prices at the establishment. "My business is legal and is centred on healthy competition," he says.
A few days before wading into the China Square saga, Kuria lamented that local manufacturers were increasingly resorting to imports. "I have told my friends at the Kenya Association of Manufacturers that I want to change their name to KAI, the Kenya Association of Importers," Kuria said. "Some of them have been importing goods and growing jobs in China and India and posing locally as if they are manufacturers."
Among the manufacturers in CS Kuria's sights are those dealing with cooking oil. "Importing edible oil in containers and repackaging the same in 20-litre jerrycans does not meet the threshold of value addition and manufacturing," Kuria said. The CS was reacting to fears from cooking oil manufacturers regarding a proposed plan for the government to import the commodity.
Representatives of local cooking oil manufacturers insist there would be no need for large-scale imports if the business environment was better. "Why doesn't the government consider incentivising manufacturers through reduced taxation and lower costs of power to bring down the overall cost of production, which will subsequently lead to lowering the cost of finished goods to the level it wants?" they asked.
There is a consensus that the cost of production in Kenya is high. Indeed, almost anything produced in Kenya is more expensive than its imported equivalent. Clothes, maize, rice, eggs, refined petroleum, shoes, milk and just about everything else you can think of are cheaper when they come from abroad than if made in Kenya.
Kenya is in an ongoing row with neighbouring Uganda over eggs and poultry. Kenyan poultry farmers say they cannot compete with cheaper Ugandan imports. Ugandan producers say it is not their fault that their products are cheaper than Kenya's. The difference in prices is due to the lower prices of farm inputs in Uganda.
The high costs of production forced many manufacturers to stop making their products in Kenya. Your favourite toothpaste may be coming from a factory in Thailand. You might have washed your clothes with a detergent made in Egypt.
The cooking oil you use is most likely from Malaysia or Indonesia. There's a high probability your baby's cough syrup was imported from India. The soap in your bathroom might have been made in Tanzania, while the tyres on your vehicle might be from China. All these products were made in Kenya until fairly recently.
Data published by the Kenya Association of Manufacturerccs proves that local production isn't growing as fast as the rest of the economy. The share of manufacturing in the national economy declined from 12 per cent in 2011 to just 7.2 per cent in 2021. The association listed the obstacles to industrial growth as high costs of production, policy instability and unpredictability, a difficult tax regime, expensive transport, counterfeit products and difficulties accessing markets.
KAM chief executive Anthony Mwangi believes that Kenya's tax system is too complicated and results in loss of revenue to the government. "Revenue generated from taxes was 13.8 per cent between 2020 and 2021, which is below the required East African Community's target of 25 per cent. This is despite heavy investments by the government to transform the tax system," Mwangi said.
Policy instability and unpredictability refer to abrupt changes to the law without adequate consultation with stakeholders. "Sudden changes in fiscal policy and regulations divert industries from productivity into meeting the costs associated with changes," Mwangi states. He believes that the country's goal of becoming a major manufacturing hub in Africa calls for pragmatic decisions that will favour the local manufacturing sector.
Why is it so important that we make things in Kenya? The answer lies in job creation. Factories, mines and plantations need thousands of workers. The years following Kenya's Independence saw rapid job creation due to the Africanisation policy and the establishment of industries meant to make Kenya a self-sufficient economy.
Many of those industries collapsed over the years as others scaled down production or relocated overseas. In many parts of Kenya, the rural economy has not recovered from the collapse of post-Independence industries. Once thriving shopping centres are now a dusty, crumbling reminder of a prosperous past.
The United Nations Industrial Development Organisation (Unido) says the advent of manufacturing in the 18th and 19th centuries revolutionised the economies of Europe and the United States. Shifting the population from peasant farming to manufacturing jobs made the agriculture sector more efficient and helped raise government revenues because there were more people paying taxes.
More recently, industrialisation has been the driving force behind economic miracles, such as the transformation of China, India, Japan, Malaysia and South Korea. Türkiye (previously known as Turkey) is also growing in influence, which can partly be explained by domestic manufacturing.
Manufacturing is, therefore, good for the country, but the problems of high fuel and electricity prices, excessive taxes and unpredictable policies should first be addressed. Meanwhile, Kenya's population is rapidly growing from 48 million in 2019 to an estimated 100 million in 2050. The growing population presents a huge market for manufactured goods, if only there were a conducive environment for investors.