Industrial drive in the reverse gear as exports hit 5-year low

When Eveready East Africa and Cadbury shut down their factories in Kenya last year, questions on the waning competitiveness of local industries emerged.

The battery maker closed down its dry cell production plant citing high input costs, influx of cheap batteries from China into the local market and  technological changes.

Apart from the domestic market, Eveready relied heavily on the export market for its revenues. On its part, beverage maker Cadbury, which also closed its Kenyan business, blamed high production costs.

It shifted to Egypt where production costs are lower.

The companies’ closure points to a declining competitiveness of Kenya’s industrial sector and reducing exports of manufacturing goods especially to the regional market, where the country has been a dominant player.

Fresh data shows that Kenya’s earnings from manufactured goods in the export market declined substantially last year.

“This is a trend that has been going on for a while. In some instances, most of the countries in the region that have been relying on our manufactured products have continuously improved their manufacturing base,” Ministry of Industrialisation principal secretary, Mr Wilson Songa, told Smart Company.

Last year, the value of manufactured goods exported declined 16 per cent to a five-year low of Sh54 billion ($592 million). In 2013, the country earned Sh64 billion ($705 million) in exports of manufactured products, most of which were destined to the East African market, Kenya’s largest trading bloc.

The trend in the last five years has been somewhat inconsistent. However, the decline started in 2012 when the country earned Sh63.7 billion ($700 million) from exports of manufactured goods.

The drop comes on the backdrop of the government’s bid to boost productivity in the manufacturing sector, raise contribution of the segment to the Gross Domestic Product and in turn increase its share in the export market.

This trend is worrying as Kenya has been gradually losing its grip on the EAC market.

Largely boosted by foreign investors, the manufacturing industries in Uganda and Tanzania have recorded substantial growth in the last decade.

A World Bank report notes that India and China are eating into Kenya’s export market. The entry of cheap goods from the two Asian countries has led to reduction in over-reliance on products from Kenya and other countries with a comparatively strong industrial base on the African continent.

Some countries in the region, keen to protect their budding manufacturers, have also come up with restrictive trade practices as they scramble for a slice of the regional market.

Kenya’s ailing sugar sector has, for instance, made the country a lucrative market for the commodity. Uganda has been fighting for a share of Kenya’s sugar market.

According to the Kenya Association of Manufacturers (KAM), 54 per cent of Kenyan exports go to EAC.

Kenya has more than 250 companies exporting goods to the region. Similarly, over 30 per cent foreign direct investment in Uganda and Tanzania is by Kenyan manufacturers who have opted to set up factories in the two countries in order to circumvent the difficulties faced while exporting to these neighbouring markets.

Kenyan manufacturers that have set base in Uganda and Tanzania include Bidco, East African Breweries Ltd and cement maker Athi River Mining. This has partly seen Kenyan exports to the region contract by 7.4 per cent from about Sh134 billion in 2012 to Sh124 billion in 2013.

The volume of exports to Tanzania declined from Sh46 billion to Sh40 billion while exports to Uganda fell from Sh67 billion to Sh65 billion in the period. Exports to Rwanda on the other hand fell from Sh16 billion in 2012 to Sh13 billion in 2013.

While the value and share of Kenya’s exports to the region declined in 2014 on account of drop in exports to Uganda, South Sudan and Rwanda, exports to the European Union and the US increased.

The value of Kenyan industrial exports to Uganda, for instance, peaked at Sh75.9 billion in 2011 with Kenya traditionally exporting lime, cement, fabricated construction materials and consumer goods to the landlocked neighbour. Kenya sells similar products to Tanzania.

Kenya Private Sector Alliance director Patrick Obath says different standards for manufactured goods, especially within the region, continue to deal a blow to Kenya’s industrial exports. The situation has been worsened by the high costs of energy and of doing business.

“The cost of energy and doing business in Kenya have increasingly made our manufactured products in the export market unattractive,” Mr Obath said. “A very small change in one standard has a huge implication on exports”.

Earlier, the manufacturers association argued that incorrect application of Article 25 of the EAC Customs Union by Uganda and Tanzania after the bloc secretariat gave various legal notices in 2008/09, made Kenyan products that benefited from the EAC duty remission scheme to start attracting the full common external tariff instead of zero per cent tariff. The Article specifies that partner states have to agree to support export promotion schemes in the bloc  to accelerate development, promote and facilitate export-oriented investments, develop an enabling environment for export promotion schemes and attract foreign direct investment.

“The same partner states maintained their own internal schemes to promote their exports in the EAC market. This has led to a decline in our exports to the region as shown by the 2014 economic survey,” Kenya Association of Manufacturer’s chief executive officer, Ms Betty Maina told Smart Company earlier.

Even with efforts by individual countries to prop up their industries, the contribution of the manufacturing sector to the gross domestic product and employment in the region is still small.  Besides, the sector is not diversified and the use of technology is low.

Most of the activity consists mainly of minimal processing of agricultural and mineral resources. This is according to an African Development Bank (AfDB) report on the region’s industrial output.

Eastern Africa’s Manufacturing Sector: Promoting Technology, Innovation, Productivity and Linkages report further  states that the share of the manufacturing sector to GDP in East African countries ranges between 3.8 per cent and 11 per cent. This is very low compared with the sector’s contribution to GDP in industrialising countries, where it ranges between 30 per cent and 40 per cent.

Kenya, which is ranked top in value added per capita in manufacturing regionally, recorded healthy growth up to 2008. It more than doubled from Sh3,549 ($39) between 2002 to Sh7,735 ($85) and 2008.

This growth was slowed down by the post-election crisis in 2007/08 and the sector is yet to fully recover, according to AfDB.

Tanzania, Uganda and Rwanda have managed to sustain reasonably strong growth in their manufacturing sectors for a while.

Tanzania’s manufacturing industry, is for instance said to have registered an annual expansion of 9 per cent between 2000 and 2010. Burundi and Ethiopia continue to lag behind in the development of their manufacturing arms.

“What we are doing now is improving the competitiveness of the local manufacturing sector by bringing on stream cheaper power and by improving transport infrastructure in the country,” Mr Songa said.

“Our energy costs need to get much lower and we need to improve our transport infrastructure as a way of improving the competitiveness of the local manufacturing sector”.

The government seeks to step up infrastructure development and reduce energy costs by turning to cheaper sources such as geothermal and wind.

In 2014, the major sources of the country’s imports were India (16 per cent), China (15 per cent) and the US (10 per cent).

Kenya imports oil, chemicals, textiles, metal, plastics, rubbers, machinery and transport equipment.

Last year, imports from the US rose significantly following the purchase of Dreamliner aircraft by Kenya Airways.

With a value of Sh151 billion ($1.66 million), imports from within Africa accounted for 9 per cent of total imports, having declined by Sh4.6 billion ($51 million) compared to those of 2013.  Agricultural products, mostly sold in raw or semi-processed form, still account for a key share of Kenya’s foreign exchange earnings with coffee, horticulture and tea taking the lead.

Perspectives

Why Kenya is  losing exports ground

This is a trend that has been going on for a while. In some instances, most of the countries in the region that have been relying on our manufactured products have continuously improved their manufacturing base.

 Industrialisation ministry PS Dr. Wilson Songa

The cost of energy and doing business in Kenya have increasingly made our manufactured products in the export market unattractive. A very small change in one standard has a huge implication on exports

Kenya Private Sector. Alliance director   Mr Patrick Obath

The same partner states maintained their own internal schemes to promote their exports in the EAC market. This has led to a decline in our exports to the region as shown by the 2014 economic survey

 Kenya Association of Manufacturer’s chief executive officer,   Ms Betty Maina