How competition drove Foton East Africa to debts

Chinese Foton vehicle manufacturer had come to drive everyone else out of the Kenyan market, instead it was driven into a Sh1.1 billion mountain of debt — and the owner banned from leaving the country.

While other Africa-based Chinese companies are making respectable profits, Foton East Africa is a classic case of how Chinese automobile firms are failing in Africa due to vicious competition and for failing to comply with local laws.

For the last 10 years, Chinese automobile firms have been targeting the growth market in the continent where there are only 42 vehicles per 1,000 inhabitants, compared to the global average of 182, according to a 2016 data from the International Organisation for Motor Vehicle Manufacturers.

Before he founded Foton, Mr Da Li had been doing business in Kenya for over 20 years. He not only married a Kenyan lady, they have a 30-year-old son but also became a Kenyan citizen.

JOINT VENTURE

Mr Li was the local representative for Foton, a joint venture between the Chinese government through its Beijing Automotive Industry Holding Company (BAIC Group) and German multinational Daimler, the world's largest commercial vehicle manufacturer.

But that was as far as things went right. On July 14, 2014 at City Hall Nairobi, officials of the company led by Beiqi Foton Motor general manager Wang Jinyu had a meeting with then Nairobi Governor Evans Kidero where they signed a Sh6.4 billion deal which would have seen the replacement of the matatus with Foton buses, operated by the county government.

So promising was the Kenyan market that Mr Li borrowed Sh1 billion from NIC Bank to set up a manufacturing plant in Mlolongo, some 20km from Nairobi on the Mombasa highway.

Under the City Hall deal, the firm was to sell 266 buses as part of the planned metro transport system. But that was just a dream and the beginning of its woes.

JAPANESE MODELS

More so, the uptake of the Foton vehicles was so poor that it could hardly match Kenya’s devotion to Japanese models.

While China is the world’s-biggest manufacturer with 29 million vehicles produced in 2017, it has no globally recognised brand since its biggest companies are either contracted manufacturers or joint ventures with global car manufacturers.

Foton East Africa’s troubles piled in 2016 when the Kenya Revenue Authority (KRA), after assessing the company’s books, demanded Sh223 million for withholding tax; something that has now seen Mr Li banned from leaving Kenya.

KRA admits in court papers that they issued the ban to force Mr Li out of hiding after he failed to meet its officials to negotiate the tax payments.

While other Chinese firms could be recording envious successes in the Kenyan economy, Foton’s tale of failure and auction of its properties has cast doubts on whether their vehicles could make an imprint in the market.

PROPERTY AUCTIONED

After Foton defaulted on the Sh1 billion, the NIC Bank auctioned Foton East Africa’s properties to recover its money.

That failure may have cost the firm dearly, but Mr Li could be the biggest loser as he has been left in a mountain of debt, at risk of losing a 10-acre piece of land he had dedicated to Foton’s warehouse and plant, and fighting to lift a travel ban instigated by the taxman over a Sh223 million demand.

The 54-year-old businessman sued KRA in May after failing to negotiate a lift of the ban.

He denies owing any taxes in the suit, but the taxman insists that Mr Li failed to prove that he can offset admitted debts hence it cannot lift the ban.

He claims that the taxman’s demand is aimed at hammering the final nail in his Foton East Africa’s coffin, to favour competitors.

EXIT KENYAN MARKET

“I believe the basis of the decisions is to harass and unlawfully force us to close our business and exit the Kenyan market in favour of competitors. Unless the honourable court urgently intervenes, Foton will be forced to lay off its workers which will lead to loss of business and livelihoods for the directors and our employees,” Mr Li says.

KRA holds that it was forced to lure Mr Li out of hiding through the ban, as he failed to honour a promise to meet its officials and talk about settlement of the taxes.

“It is only after the issuance of the departure prohibition order on December 14, 2017 that Mr Li through Foton’s tax agent Stratton Consulting Limited, contacted KRA in a move to settle the tax matter. Once Mr Li became aware of the travel ban, he sought a meeting with us pursuing a lifting of the said order,” KRA assistant manager, enforcement Walter Odede says in suit papers.

ASSEMBLY PLANT

While Foton only opened its Nairobi plant in 2014 through Mr Li, the firm’s trucks have for years been locally assembled at Thika-based Kenya Vehicle Manufacturers (KVM).

The Kenyan government has a 35 per cent stake in KVM.

The decision to put up an assembly plant in Kenya was in line with Foton’s plans for market expansion which was expected to yield more sales.

At the time of its entry in Kenya, the manufacturer’s parent firm Beiqi Foton was struggling as its 2011 profits had dipped by 30 per cent to $182.54 million (Sh18.4 billion) from a year earlier.

Africa was one of the markets to be conquered and the expectations were high.

Last year, the Chinese vehicle manufacturer’s profits fell by 80.25 per cent to $17.82 million from $22.2 million in 2016.

MOVED TRUCKS

In Kenya, Foton has opted to move its trucks through established car dealers like Pewin Motors and Roton Africa.

To fund the Foton East Africa warehouse and plant, Mr Li borrowed Sh1.1 billion from NIC Bank. The loan was guaranteed through another firm he owns—Gold Lida Limited.

Mr Li’s plant did not miss out on controversy, as in 2014, KVM accused Foton of using a guise of inspecting vehicles assembled in the Thika facility to poach its staff.

Foton had then sued KVM for refusing an inspection or release of 12 vehicles.

KVM then argued that Foton had poached 12 of its employees since December, 2012 and that allowing the Chinese firm access to the plant could see more workers leave.

One year later, Foton bagged the highly contested City Hall tender for supply of 266 buses to be used in a metropolitan public transport project.

TENDER CANCELLED

But the victory was short lived as county assembly members months later called off the $73 million deal, arguing that then Transport minister Evans Ondieki did not consult them before approving it.

Worse still, the firm claimed in yet another suit that City Hall irregularly cancelled a tender for supply of vehicles worth Sh82 million after it had customised the machines.

Foton also claimed that City Hall had not paid for another set of vehicles earlier delivered worth Sh70 million.

The Chinese firm sued City Hall for Sh152.8 million, a dispute that is pending in court.

In 2015, KRA formed a task force to probe a number of bonded warehouses, and Foton found itself under audit.

In June 2016, KRA reached out to Mr Li who requested that he be given 10 days to return to arrange for a meeting with the taxman. But for one year, no communication came from Mr Li.