The Next Frontier in Kenya’s Automobile Industry
Kenya’s motorization rate stands at 28 vehicles per 1,000 inhabitants as at 2015, translating to an estimated 2.5 million vehicles on Kenyan roads. This is in comparison to a motorization rate of 7 in Tanzania, 13 in Uganda, and 176 in South Africa. With an annual growth rate of 11 per cent, Kenya is likely to have close to 5 million vehicles on the road by 2030, equivalent to a motorization rate of 56 vehicles. With Africa’s average rate being 42 vehicles, Kenya seems to be on a good growth path.
Currently, Kenya depends on imported motor vehicles from Japan, majority of which are secondhand and selling for as low as US$ 3,500. In 2015, out of the 247,181 vehicles duly registered, only 19,523 (8%) were new (both locally assembled and imported). Personal cars accounted for 14 per cent and the rest were commercial vehicles explained by 10 per cent light commercials and 90 per cent heavy commercial vehicles. In the same year, Tanzania recorded 5,200 new sales, Uganda 3,100 and South Africa sold 617,749 new cars. The dominance of commercial vehicles in local assembly indicates a business-oriented automobile industry. The Kenyan market has also recorded a decline in importation of personal cars from 18 per cent of all imported motor vehicles in 2013 to 16 per cent in 2014 and 14 per cent in 2015.
The automobile industry in Kenya dates back to 1960s and 1970s when various international leading vehicle manufacturers entered the market with a key focus on assembling commercial vehicles. Volkswagen entered the Kenyan market in the 1960s to assemble the beetle cars, vans and microbuses but closed down in 1977 at the height of oil crisis and shifted focus to China. Leyland Kenya Limited was then established in 1974 as a joint venture between the Government of Kenya and the UK-based Leyland to assemble Nissan trucks, Ashok Leyland trucks, Land Rovers, trailers and semi-trailers, Hino trucks and buses, among others. In 1975, a joint venture between the Government of Kenya and General Motors saw the establishment of General Motors East Africa, focusing mainly on Isuzu pick-ups, buses and trucks while Associated Vehicle Assemblers Limited was founded in 1975 to assemble Toyota cars such as Land cruisers, Dyna, Hilux, Hiace and Stout.
The automobile industry in Kenya has also seen entry of dealers involved in distribution of new cars. These include CMC Motors which was established in 1912 to exclusively distribute Volkswagen, Mazda, Ford, Suzuki and new Holland tractors and also provide spare part sales and after sale services. Amazon Motors, Toyota Kenya, Simba Colt Motors and DT Dobie are other dealers involved in distribution of new vehicles in Kenya.
During 1990s, the government adopted structural adjustment programmes, financial sector reforms and trade liberalization policies aimed at opening up the Kenyan market and eventually enable locals to access imported vehicles cheaply. Importation of secondhand motor vehicles increased competition for the local assemblers and distributors and, as a result, slowed the growth of the automobile industry.
The prospects for automobile industry improved when East African Community (EAC) customs union relaxed its rules of origin in 2015, which allowed locally-produced goods to trade preferentially after complying with 30 per cent local content requirements. Prior to this, motor vehicles produced in Kenya were taxed at a common external tariff (CET) of 25 per cent due to lack of compliance to the rules of origin, making them more expensive and less competitive in the regional market compared to secondhand imports from the rest of the world. Further, the EAC is now conducting research on automobiles industry, which will adequately inform policy decisions.
With a focus to revitalize the automobile industry, the Kenyan market has witnessed entry of new international car manufacturers as well as re-entry of companies that had exited the market and the expansion of those on the ground. Peugeot, a French car assembler that closed in 2002, commenced Peugeot brand vehicle assembly in June 2017 in Thika under the partnership of PSA Groupe and Urysia Limited with a vision to serve the regions’ market. Volkswagen has once again started the assembly of Volkswagen Vivo cars, which comes with a three year warranty, three year service plan and after-sale services. Toyota opened its assembly plant in Mombasa in 2013 and TATA motors from India was launched in 2009, setting a base for entry into the East African market. Volvo is planning to roll out an assembly line for lorries in 2018 in partnership with local firm NECST Motors. Honda also has plans to produce motor cycles using local materials.
Kenya is yet to make a break through with locally manufactured vehicles. The first attempt for Kenya to have a car manufacturing plant was in 1986, when the former President Moi commissioned the University of Nairobi to develop a car affordable to Kenyans. His motivation was to have a car that was built in Kenya, by Kenyans unlike the foreign models that were being assembled across Africa. This saw the Nyayo Pioneer prototype launched in 1990 with the ability to run at 120 kilometers per hour. However, due to inadequate capacity in automobile engineering as well as funding, the Nyayo Motor Corporation established to do mass production did not pick up. Kenya thus lost an opportunity to build capabilities in vehicle manufacturing industry.
In 2011, Mobius Motors of Kenya was established by a British computer engineer who wanted to help Kenyan farmers increase their productivity. He therefore sought to develop cars suited for the African terrain, taking into consideration both vehicle loading and income levels. The first generation car hit the market in 2015, selling at a price similar to that of a seven year old imported sedan. Mobius is now upgrading its technology and will be unveiling its new generation car in 2018.
The industry has minimal locally produced inputs and is, therefore, dependent on completely knocked down (CKD) kits. To enhance local automobile production, the government has provided for 25 per cent import duty and 20 per cent excise duty waiver on importation of CKD kits. The waiver gives incentives to the automobile industry to enhance operations and adjust prices downwards. The government has also imposed tariffs on automobile components that are imported and could be locally produced to encourage the local industry. Further, the government is keen on developing an industrial park specialized for automobiles, with special tax treatments and forming a National Automotive Industry Committee whose mandate will be to coordinate and develop the automotive value chain.
In line with the Kenya national industrialization framework, a favourable policy environment is essential for the automobile industry to thrive. As a priority, Kenya needs to build capabilities in automobile industry. Currently, assemblers send their technical staff abroad to build on their skills as local institutions of higher learning are yet to design specialized courses suitable to propel automobile production. Assemblers are also adopting on-the-job training and requesting to be involved in reviewing and updating their training curriculum to reflect industry demands.
Kenya also needs to develop an Automotive Industry Policy to provide the necessary targeted support to the industry to spur growth. In addition, other auxiliary industries such as auto components and spare part manufacturers should be encouraged to curb importation uncertainties.
To transit from imported secondhand vehicles, measures are required to promote local consumption of new vehicles while boosting locally assembled cars. For example, South Africa prohibits importation of fully built units, which encourages growth of the domestic market. Japan, on the other hand, has imposed scrapping measures on 3 year old cars from the roads to boost local production and consumption and at the same time ensuring environmental protection with emission efficient vehicles. There is also need for an appropriate financing plan in Kenya to facilitate purchase of new vehicles while spreading re-payment for a period of time.
While significant efforts have been made to improve the business environment, more is required to ensure supply of adequate, cheap and quality power to the automobile industry. The establishment of special economic zones with special tax incentives points to a right direction in attracting investors in the automobile industry.
With a nominal GDP of about US$ 70 billion and a per capita income of US$ 1,455, Kenya demonstrates a dynamic and sizeable middle class that can promote consumption of new vehicles. In addition, access to regional markets makes Kenya a potential destination in attracting new investments in automobiles.
Authors: Eric Mokwaro Bosire and Naomi Nyanchama Momanyi
KIPPRA Young Professionals, Private Sector Development Division