Volkswagen: Why now is the time to produce the Polo Vivo in Kenya

Nairobi, Kenya

Nairobi, Kenya

Volkswagen is expanding its presence in Africa with local production of the Polo Vivo in the Kenyan city of Thika near Nairobi. It plans to build up to 5,000 units per year at the plant, which will be operated by Kenya Vehicle Manufacturers (KVM) from 2017.

How we made it in Africa’s Justin Probyn spoke to Thomas Schäfer, Volkswagen South Africa’s chief executive offer, to get a more detailed picture of the company’s future operations. Listen below.

First off, how long has Volkswagen been manufacturing in Africa?

We started 65 years ago in our factory here in Uitenhage, South Africa, with the Beetle. We just recently, two weeks ago, celebrated our 65th birthday anniversary.

I believe you had produced the beetle in Kenya before, why did you exit the market then?

Well the Beetle, in the 60s particularly, was produced in many countries around the world in CKD (completely knocked down) phase. But a lot changed during the oil crisis in that time, as well as when Volkswagen then later focused more on the China ventures. A lot of these small operations – with their problems within the countries – were actually reduced, and one of them was Kenya, where at the time apparently the management thought there was no greater hope, which I disagree [with]. It was at that time.

What was the motivation to then begin producing vehicles in Kenya again?

When you look at Africa from a European perspective, you see from outside-inside to most of these countries. You would see the officials numbers, vehicle numbers and you would see that there is really no chance to have manufacturing or to get going. But when you go there and when you see what actually happens on the roads and see all the cars, you realise that it’s all used cars at the moment – which the government is also not too happy about; it doesn’t create jobs and there is a big drive to get into manufacturing and also exports and all of that. So we think it’s at an inflection point, where the production of passenger cars – it’s now the right time to get started, which the government agreed to.

I believe you also have operations in Nigeria and South Africa already, how do you think the operations in Kenya will differ from those?

Well in South Africa, as I said, 65 years ago we started. So it went through the typical CKD phase of developing countries. We are now much further down the line in South Africa – we are basically like any other big-scale manufacturing all over the world. We actually recently won the number one factory within the Volkswagen production network here in South Africa, so we are top-notch. Nigeria is further behind in their development. They just recently started – about two years ago – with the CKD operation, and Kenya will go through the same development phase. It usually goes from CKD into more localisation, into higher numbers, and eventually into full-scale production, with press shop and all of that – but that goes a long with the development of the local market.

What challenges do you foresee in the Kenyan market, from production to sales?

What Kenya has is a very high level of education. It is a great base to start from; they have got a great education system and a lot of motivated, young people. What Kenya hasn’t got is a very developed financing side of vehicles, like consumer financing. So in South Africa we have obviously a lot of banks that finance vehicles, and it is different if people have to fork out the cash upfront for a vehicle, 100%. Or, you can have a convenient financing plan that allows you with a monthly payment to get a new car. I still see this as the biggest challenge, together with the used-car market that obviously needs to be reduced if cars that are seven of eight years old, from Japan; get dumped in Africa at cheap rates – then obviously that never creates a base for a production environment. You can never compete with that and the government is intent on doing that.

Does this tie into why you think the Polo Vivo model is best suited for the Kenyan market, and by extension the East African market?

Well the Polo Vivo is the best-sold vehicle in sub-Saharan Africa. It is by far the best seller in South Africa and it is a little bit in the tradition of the Beetle, where it is affordable, convenient, reliable, and it is a brilliant five-people mover with luggage that has a very high resale value after two, three, four years – which makes it super attractive also to rental-car companies and so on. So this vehicle makes a lot of a sense in a developing market like Kenya – from our point of view – which at the moment is driven only by old, used cars as well as pickups. And I think there is a big need in congested cities. I mean when you look at Nairobi, at the traffic situation, they need smaller cars, more fuel-efficient and less exhaust fumes.

As I mentioned before, The Kenya Vehicle Manufacturers Association (KVMA) will be operating the production plant – how is this beneficial to Volkswagen?

Well they are an established organisation in close proximity to Nairobi city. Thika is only half-an-hour outside Nairobi. The plant layout is a greatly planned layout, I was surprised to see that when I saw it first time. They even have railway access – you can unload containers right there. So everything is there, they are very much under-utilised at the moment. Our partner [DT Doby] is a 30% shareholder in this company, so we decided to use the facility until such time that we grow too much, and then we will of course look for an own facility.

And how will the production of cars in country affect the Kenyan buyer – will it be beneficial?

I would say so. First of all, it creates jobs and when you are going to get seen as a multi-national car on the ground, that helps customers make that decision easier. It also helps the customer that they don’t get like a seven- or eight-year, or even older vehicle that they’ve never seen before, without any warrantee, without any guarantee that this car doesn’t break down next week and has a capital engine failure and it goes out of their pocket. Here is a new car with full-warrantee service plan and which is also financeable by banks. So there is a chance for a Kenyan customer to really get into a new car and ease of mind – I mean this is what the young people, especially in Kenya, want. So we think we have got a good case here.

I believe that you’re also planning on building a training centre in Kenya – what is the aim of this centre and has something similar been established in Nigeria or South Africa before?

Yes, I mean building vehicles is not as easy as everybody thinks – there is a lot of training that needs to go into that. But also what we now, for example, do in South Africa, is that we have a very big established training facility, really close to our factory. We don’t only train our own people, but we also train unemployed people from the region. We do basic skills for a lot of external people in other companies. And with that you lift the general skills level and availability of skilled labour in the market – which then goes into dealerships, after-sales and so on.

So we think it is key to development and upliftment, and we decided in the case of Kenya to partner up with the German government, who’ve also got quite a bit of programmes and plans going for Africa, and speak to them about keeping the young people in the country. These refugees that are happening at the moment – people leaving all over the place because there is no hope and employment. When you get people trained and given the chance to be even an entrepreneur in the long run, I think it makes a lot of sense. So we have agreed to set it up; we are just talking with the German government on how they come on board – maybe even with other bigger German companies, so that we do something together. But we think it is key for a sustainable development in the automotive industry.

And finally, are there any plans for expansion into further African countries in the near future?

Yes, we are talking with a few other African countries at the moment. Some of them a little further down the line, that we are closer to an agreement with, some not – we will see. I think in Africa – simply because of the huge logistical distances that we have – we have to do at least one or two more operations to get started with a proper African strategy. For now it is Nigeria, Kenya, South Africa. There are a couple of projects in North Africa at the moment, but I have got some personal preferences that we are working on which are also more on the eastern side of the continent. So very promising.

Brilliant, thank you for your time Mr Schäfer.