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Cheap imports, high costs: Why many businesses are closing shop

A wave of company closures which has hit Kenya over the recent past has raised questions about the state of business environment in the country.

About 2.2 million small enterprises have closed shop over the last five years, underlining the tough challenges that the local business climate poses for investors.

Many of the firms cited a harsh business climate as the reason for their fall, top on the list being the high cost of energy, especially for manufacturers.

A fortnight ago business tycoon Peter Kuguru put his 20-year-old beverages company up for sale, marking the end of an era in which a Kenyan firm took global giant Coca-Cola head-on.

Mr Kuguru announced his Softa Bottling Company was folding up due to financial difficulties occasioned by failure to secure a joint venture partner.

The bottler’s products, including Softa soda, predominantly found acceptance among low-income consumers during its two-decade existence.

In an interview, Mr Kuguru gave a candid assessment of his company’s downfall after enjoying a stint as an emerging force in the industry.

READ: Kuguru reveals why he threw in the towel on Softa

Not alone

But his firm is not alone. Some 2.2 million micro small and medium enterprises (MSMEs) shut down in the last five years including 2016, according to a survey by the Kenya National Bureau of Statistics (KNBS).

The report, Micro, Small and Medium Establishments, says most of the businesses that shut down were in wholesale and retail trade as well as repair of motor vehicles and motor cycles sector which accounted for 73 per cent of the total closures.

The report says businesses went down at an average age of 3.8 years.

“Establishments that were started or acquired within the last two years were more vulnerable to closures and they accounted for 61.3 per cent of the total businesses closed,” the report states.

The highest number of establishments shut down was in 2015, accounting for 35.4 per cent of the total number of closed enterprises in the last five years. About 1.2 million were closed in rural areas compared to one million in urban areas.

The main reason cited for business closure was shortage of operating funds as reported by 30 per cent of the businesses owing to increased operating expenses, declining income and losses incurred from businesses. Diversion of returns and operating capital from the business to other uses also led to business closures.

Sameer Africa in September announced it had closed its Yana tyres manufacturing factory in Nairobi citing increased competition from cheaper imports, dealing yet another blow to Kenya’s ambition to industrialise.

The company, through a notice to the Capital Markets Authority (CMA), said its board had decided to discontinue local tyre production at its factory on Nairobi’s Mombasa Road.

READ: Sameer shuts down Nairobi tyre plant in favour of imports

The firm had earlier warned of a possible shutdown citing the government’s failure to curb dumping of cheaper and low quality imports in Kenya.

It will now outsource its tyres from producers in low cost China and India — a double whammy for the Kenyan economy in terms of job losses and waning momentum to industrialise.

“At a meeting held on Monday 29 August, the board of directors resolved to cease the manufacture of tyres and allied products at the Sameer Africa in Nairobi and to commence off­shore production by tyre manufacturers domiciled in China and India,” the company said in the note to CMA.

Sameer expects its balance sheet to take a hit owing to the closure and has consequently issued a profit warning. It expects its profits to drop by more than 25 per cent in the current financial year.

“The company will incur a one­off charge in respect of plant and inventory impairment and employee severance cost estimated at Sh725 million,” Sameer said, adding there will be layoffs, especially among employees directly involved in manufacture of tyres and tubes.

Sameer is majority owned by businessman Naushad Merali who has a 72.15 per cent stake in the company.

Closure of the factory, which has been in operation for decades, added to a long list of  manufacturers who have exited the Kenyan market citing a harsh operating environment.

READ: Eveready sinks into loss after factory closure

Eveready East Africa closed its Nakuru-based battery factory in September 2014 in what the company attributed to increased competition from cheap dry cells imports, resulting in massive job losses.

A month later, chocolate maker Cadbury shut down its factory in Nairobi, dealing a blow to Kenya’s quest to industrialise by 2030.

Other manufacturers that have recently closed production lines in Kenya include Procter and Gamble and Reckitt Benckiser.

Most cited high cost of doing business mainly driven by high cost of energy as reason to relocate.

Industrial power costs

Kenya’s industrial power costs are higher than most of its African competitors, blunting the country’s competitive edge, according to the Kenya Association of Manufacturers (KAM) – a lobby for industrialists.

Kenya’s industrial power costs stand at an average of Sh17 per kilowatt hour (kWh) compared to Tanzania’s Sh12 per unit ($0.12), Egypt’s $0.11 (Sh11) and Ethiopia’s $0.09 (Sh9).

South Africa, the most industrialised economy on the continent, is $0.06 (Sh6).

Globally, Chinese industrialists get power at the cost of $0.03 (Sh3) per unit while India is at $0.09 (Sh9). Local manufacturers also shoulder the burden of erratic power supply, which stalls production and saps employee morale.

Sameer said it was finalising contract manufacturing agreements with companies in India and China as it shifts production from Nairobi.

In 2014, it contracted a Chinese firm to produce Summit tyres for the low-end market.

Sameer’s bid to form a joint venture with a technical investor — to modernise its tyre factory in Nairobi — collapsed last year after the parties failed to agree on the valuation of the business.

The firm plans to diversify to real estate in the wake of flagging fortunes in the tyre manufacturing business.

Asian makers are also subsidised up to 80 per cent of their sales, allowing them to gain market share in East Africa where cheaper tyres are in high demand.

Manufacturing’s contribution to Kenya’s gross domestic product (GDP) has averaged 11 per cent in the past 10 years showing a general stagnation of the sector.

The World Bank early this year warned that increased Chinese imports could lead to Africa’s “de-industrialisation” even before the region enters the industrialisation stage.

Analysts reckon that there is need for a policy rethink to lock out imports that local manufacturers can make, and letting in only capital goods such as machinery.

Different picture

As companies close shop citing a difficult business climate, a different picture is, however, being painted by government officials who insist  that a raft of business reforms may be paying off.

READ: WERE: Why Kenyans can’t feel effects of rosy economic growth data

State officials point to Kenya’s standing in the latest World Bank Ease of Doing Business report, which says it has improved by 21 places.

The 2017 report shows that the country was placed at position 92 out of 190 countries surveyed, with Mauritius and Rwanda outpacing Kenya at 49th and 56th place respectively.

New Zealand replaced Singapore this year as the easiest place in the world to do business.

Kenya’s improvement was credited to five reforms in the areas of starting a business, obtaining access to electricity, registering property, protecting minority investors and resolving insolvency.

“This is a marathon and we will not be complacent until we attain position 50 by 2020,” said Industrialisation Cabinet Secretary Adan Mohamed in Nairobi while welcoming the results of the report. Kenya was also ranked as the world’s third most reformed country.

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