Start-ups don't grow without honest business partners

Monday November 27 2017

By BITANGE NDEMO
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Jon Meade Huntsman Sr., the founder and executive chairman of Huntsman Corporation, a global manufacturer and marketer of specialty chemicals and author of Winners Never Cheat, made an interesting observation in his book:

“There are no moral shortcuts in the game of business or life. There are, basically, three kinds of people, the unsuccessful, the temporarily successful, and those who become and remain successful. The difference is character.”

Huntsman attributes his success in building a $12 billion enterprise to integrity. Many other organisations have become successful and remain successful based on their values of integrity and honesty.  

As we begin to gear up towards the promise of industrialisation in Kenya, these virtues are becoming rare.

In the past three months, I have been mentoring youths developing new enterprises in manufacturing.  This week’s blog is comprised of my observations and views.

I hope policymakers will take notice and take necessary action to correct some of the problems that may be hindering industrialisation.  

POST-PORT CHECKS

The youths have spent a great deal acquiring the necessary equipment but they have not moved past producing the right sample of their products.  Reason: there are no good suppliers of their inputs. 

Most suppliers cheat by adulterating the chemicals these young entrepreneurs need, and they are not alone in making these claims. The Daily Nation carried a story on November 9, 2017 with the title, “Agency raises red flag over dangerous milk.” 

In the story, the Kenya Dairy Board raised the “alarm over heavy presence of drug residues, including antibiotics, pesticides and preservatives in milk.”  Greedy suppliers use unorthodox chemicals to delay fermentation of milk or add wheat and water to increase quantity.  The people doing this are devoid of any values. 

Small start-ups that often have a significant market do not have the resources to invest in quality control tools, or to import the large quantities of materials they require for production. 

Instead, they rely on the integrity of suppliers or middlemen, who import large quantities of some of these chemicals then break them down to smaller, more affordable quantities.

Ordinarily, the Kenya Bureau of Standards (KEBS) protects customers by ensuring the right quality but it is not clear whether there are post-port checks of oil and other chemical imports.

SIX DIFFERENT SUPPLIERS

When start-ups approach suppliers, they do so expecting to build a lasting relationship.  Unfortunately, some middlemen are short sighted and in the long-run, they fail to succeed. 

Huntsman refers to these types of entrepreneurs as those who succeed only temporarily.  Even new customers do not stay too long before seeking another supplier. 

In our case, it took six different suppliers before we fully understood the supply chain, and the weak areas where unscrupulous middlemen exploit new entrants into the chemical manufacturing industry. 

Many small enterprises do not bother pursuing these criminals to courts to recover their losses; they simply don't have time and money to do so.

Yet it does not take a genius to reveal these criminals and punish them. Preaching integrity and honesty alone won’t stop the criminal activity that hinders industrial development but must be accompanied by investigative agencies posing as customers.

Indeed, on pharmaceutical products, there exists a unit called pharmacovigilance within the Pharmacy and Poisons Board, which randomly samples products in the market and tests them against the declared standards. 

IMPORT MAZE

However, the supply chain of most products, especially imported inputs, is so complex that start-ups would simply collapse at the port of entry if they attempted to import by themselves. Middlemen play a critical role but they must be regulated.

Our attempt to aggregate small manufacturers and import became too expensive and made production uncompetitive. One has go through not less than 20 processes to import anything successfully.  A mistake at any process piles up costs. 

For example, if an importer fails to get pre-shipment inspection from supplier base, KEBS will levy 15 per cent of the value instead of the usual $.25/item, with a minimum charge of $250 irrespective of the quantities imported.

Shippers have also found ways to fleece small importers. If they do not act as your import agent, they, instead of handing you the documents, levy Sh5000 for what they refer to as breakbulk (breaking down the shipment to individual owners). 

There are several other levies including agency fees, storage, railway development, transport and different types of taxes.  With these kinds of levies, start-ups have no chance of making it through the import maze and producing competitively.

Information with respect to import processes cannot be found anywhere. It is also impossible to do it yourself due to the opaqueness of the entire process. For example, to pay taxes through the Simba system, you need a clearing agent. 

LONG-LASTING TRUST

Getting young entrepreneurs to succeed inherently needs honest middlemen.  Ordinarily, a free market economy should make the adjustment, with some of them becoming trustworthy, but it is simply becoming too costly. Regulators must intervene. 

Government must reduce the many regulatory bodies with conflicting to just new one with clear roles.  There is no logic to having KEBS and multiple professional bodies trying to do the same thing at the expense of industrialising the country. 

Cumbersome processes create opportunities for dishonest businessmen.

Studies have shown that honest business practices encourage customer and staff to align themselves with the entrepreneur’s mission. Honest business practices build long-lasting trust with stakeholders, who in most cases help brand the organisation.

Indeed, when entrepreneurs deal honestly with suppliers, investors, creditors as well as employees, brand value increases, greater confidence emerges and funding the organisation becomes easier.

If there is a time when policymakers must be vigilant about entrepreneurial robbery, it is now when many young people are turning to entrepreneurship to create wealth in the absence of employment. 

We can learn from the second industrial revolution in the US, where ambition was sometimes above ethics.  The critics of the time called the successful moguls “Robber Barrons”.

This is precisely what is happening here, where a small clique of people have established powerful links to exploit a nascent manufacturing industry.

UNDERSERVED POPULATION

The government has a role to ensure that start-ups are not only protected but also incubated, and their development accelerated to create much-needed jobs. 

The number of start-ups manufacturing lotions, soaps and other sanitary products is rising, addressing a huge underserved population in disadvantaged neighbourhoods. 

These are the emerging industries that may one day compete with multinational enterprises established in Kenya. Dishonest suppliers should know that their role is critical to economic development. 

To thrive as future manufacturers, small start-ups need good services. The success of these start-ups provides opportunities for the sustainable creation of middlemen and a chance to build a long-lasting business relationships. 

Besides the law, character remains supreme in any relationship.

The writer is an associate professor at University of Nairobi’s School of Business. Twitter: @bantigito