Q&A: Unpacking Kenya’s manufacturing sector

Phyllis Wakiaga, CEO of the Kenya Association of Manufacturers

Phyllis Wakiaga, CEO of the Kenya Association of Manufacturers

In Kenya, manufacturing accounts for a relatively small proportion of GDP despite the East African country having vast resources and a well-educated workforce. How we made it in Africa speaks to Phyllis Wakiaga, CEO of the Kenya Association of Manufacturers (KAM), about the state of manufacturing, the growing influence of China, and the industry’s attraction to foreign investors. Below are edited excerpts.

How would you describe Kenya’s manufacturing industry?

My view is that it can do better. There really is a lot of room for improvement. The industry has been stagnant for the last five years. Its contribution to GDP has been stuck at about 10%. Projections by the World Bank’s economic update, titled Kenya economic update: anchoring high growth – can manufacturing contribute more?, indicates Kenya’s manufacturing sector will grow by 6% this year and maybe 6.6% next year.

Our value addition is fairly low, meaning the manufacturing sector has a lot of opportunities for growth. The sector is stagnant because we have open markets – and goods are moving freely across the world. It means we have to be more competitive as a country.

How stable are we to attract investments? Issues of policy, taxation, infrastructure, regional integration [and] the cost of energy all come into play. There is also need for consumer awareness to promote consumption of locally produced goods. The everyday consumer might not always understand the link between buying local and creating jobs.

There is also a perception that foreign products are of better quality – yet local companies are manufacturing to international standards and are in fact selling their products to international markets.

What is your view on China and its impact on Kenya’s manufacturing industry?

China poses a challenge because it is a key competitor to our local manufacturers. Their cost of manufacturing is lower and in certain sectors there have been allegations that they are selling at exceedingly low prices. In the steel sector, for example, a number of countries have imposed safeguards against Chinese steel due to their very low prices.

Even here in Kenya there is a lot of cheap Chinese steel, and this is hurting some local manufacturers. Even though some Chinese products are of high quality, there is general concern about standards because, in some cases, they have an unfair advantage over local companies. In the iron sheets sector, for instance, we have competition from sub-standard goods coming from China.

In Ethiopia the story is a bit different with Chinese companies setting up factories there. Why isn’t Kenya attracting Chinese manufacturers in large numbers?

Some light manufacturing companies in China are looking at places to relocate to, including Africa. For Kenya that is good, because eventually we could have some Chinese companies relocating here. I think we have the tools in place to attract investors.

There have been many developments this year in terms of legislative frameworks, so I think in coming years we should see more foreign investment. However, we still need to do more about electricity. The energy cost in Ethiopia is much lower, but on the upside our foreign exchange policies are much more flexible than in Ethiopia and our quality of labour is also slightly more advanced. So as a country we still have an attractive edge, and we should expect to see much more foreign and local investment in coming years.

We have seen some companies expanding their operations, such as Wrigley (an American chewing gum company), and some foreign companies have expressed interest to set up here. So there is expansion and investment by new players, but not at the rate we would prefer. I am optimistic that in the next one to two years we should see better growth in investments.

But we have seen some companies here either downsize or exit, among them Cadbury and Eveready?

It is a paradox that some companies are expanding and entering the market while others are downsizing or leaving. As I mentioned, manufacturing should have been growing at a much faster rate and attracting more FDI than it does currently. Some companies have struggled with the cost of energy, the competitive business environment and policy issues – and these lead them to move to other countries. But sometimes companies make the decision to leave because of strategy – and not necessarily the business environment.

We saw Eveready shut down its factory last year because of counterfeits that made it impossible for them to compete. For us as KAM, illicit trade is a big issue. There are now increased efforts to clamp down on counterfeits, and there have been a number of seizures in the last few months. We now have inter-agency collaboration which is very beneficial because previously officers from the anti-counterfeits, standards and tax bodies would only look at their purview. Yet in most cases a counterfeit product will be sub-standard and chances are taxes would not be paid on it. So inter-agency collaboration is a step in the right direction and should help solve this problem moving forward.

Companies often cite corruption in government as a challenge, but research shows the private sector is also feeding the problem. How is corruption affecting manufacturers?

Corruption is a challenge and it has been acknowledged by government. There are many efforts to try to combat it. But we know that some private sector companies engage in bribery – sometimes due to uncertainty in policies, due to a lack of information that may leave someone compromised, and the lack of automation. So the move by government to automate its processes and streamline the procurement process should lead to a reduction in corruption.
The issue of regulation can also perpetuate corruption – so harmonisation in that area should also help. There should be a simplified way to register your business, get your licence to do business, to pay your taxes. More than 200 companies have signed the business Code of Ethics… [committing] to eradicate all forms of corruption, be it bribery or extortion.

But of course for something as systemic as corruption you require more than just signing a pledge. It requires broader measures – like changing our value system as a country, evaluating how operations are done within our organisations, streamlining our processes and automating our organisations. We are making some progress, and a number of companies have pledged to only trade with suppliers who have signed and met the same standards. As businesses, if we are able to among ourselves challenge each other to up our standards in terms of ethics, it will have a positive impact on the environment and how we relate with government.

Earlier this year legitimate alcohol manufacturers lost millions of shillings because of a presidential directive on the destruction of illicit liquor. What would you tell a foreign investor about the security of their investments?

Investments are safe here. But there are some issues we need to streamline so that there is more stability in terms of policy, and stability for the investor to make long-term decisions. Sometimes we see knee-jerk reactions where government comes up with a new law throwing everyone into confusion. When too many things are changing, investors get jitters.

The statutory instruments give some good provisions on ensuring impact assessments are carried out before there are any significant changes in regulation. If there is going to be significant impact on a business, such as through that directive on illicit liquor, there has to be adequate stakeholder consultations. We try to sensitise government on this because often 80% of the people are affected because of the 20% who are not doing the right thing. Improvements can be made, but this is a good country to invest in.