MANUFACTURING IN KENYA: APPAREL-TEXTILE, LEATHER, AND FURNITURE October 2015
Table of contents 1. Mandate and methodology 2. Structural similarities across sectors 3. Kenya’s positioning and cross-cutting recommendations 4. Conclusion
The manufacturing sector is a critical component of the Kenyan economy, although performance has been sub-optimal 10%
Kenyan manufacturing vs. GDP % growth rates (2010-2014)
8% GDP average: 6% Manufacturing average: 4%
6% 4% 2% 0% 2010
2011
2012 2013 Manufacturing Kenya GDP
2014
•
The manufacturing sector was the second largest contributor to GDP in 2014 (c.10%), and formally employed 287,500 people.
•
Manufacturing is crucial to job creation, industrial development, and growth •
The fastest growing sectors in Kenya (financial services and communications) added less than 10,000 jobs per year between 2009 and 2013.
•
The 4 sectors with the highest productivity growth between 2009 and 2013 accounted for only 7 percent of total employment. • A single new apparel factory in the EPZ adds 2,000+ jobs.
4
Rationale and mandate from Ministry of Industrialization • MOIED requested WB assess the competitiveness of several labor-intensive sectors: leather & leather goods, textile & apparel, and furniture-timber • Understand their current state of development and main constraints • Propose strategies and assess policy options • Recommend interventions necessary to accelerate growth, leveraging international experiences
5
Methodology: Limited data availability made for a challenging and time-consuming research process •
Gathered existing studies and policy documents
•
Analysed official data:
•
•
KNBS Economic Surveys & Census of Industrial Production
•
WB 2013 Kenya Enterprise Survey
Conducted surveys, field interviews, and in-depth conversations with industry stakeholders and panels of experts •
In furniture, we surveyed 244 stakeholders across the country and across each stage of the value chain
•
Held public consultations
•
Collaborated extensively with Ministry—at CS, PS, and technical levels—and Kenya Association of Manufacturers (KAM)
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Table of contents 1. Mandate and methodology 2. Structural similarities across sectors 3. Kenya’s positioning and cross-cutting recommendations 4. Conclusion
1. Limited official data = lots of professional guestimates! • Official data was useful for apparel where exports are significant and firms are concentrated (and formal) • Sample size was too small to draw conclusions for leather and furniture • Only medium and large companies represented in KNBS’ industrial “census,” so only partially useful for understanding industry size 8
2. Challenging business environment means firms face an uphill battle Comparison of Import/Export Costs among Competitors (USD/Container)
• High electricity prices
Vietnam Cost to import (USD/container)
India
• Limited access to finance Cost to export (USD/container)
Bangladesh
• Complex regulations for non-EPZ firms • Poor roads and challenging logistics
China South Africa Lesotho Ethiopia Kenya -
9
500
1,000 1,500 2,000 2,500 3,000
3. Balance of power in sectors is skewed, with manufacturers at a disadvantage In leather, tanneries are the strongest players Abattoirs & Animal Husbandry and Traders Raw Hides & Skins
Tanning
Wet Blue & Crust
Manufacturing
Finished Leather
Leather Products
And in furniture, competition issues in the wood-based panel subsector prevail Forestry
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Timber harvesting and transport
Timber processing
Timber trade
Furniture industry
Furniture outlets
4. Limited collaboration across value-chains and within sub-segments of each value-chain • Very little outsourcing between the formal and informal sectors • Limited specialization among companies • No voice vis-à-vis Government • Limited leadership and cooperation for sector-wide improvements 11
5. Uncertainty around sector sustainability undermines willingness of private players to make investments for growth • In apparel, continuation of AGOA (resolved!) • In leather, tanneries’ preference for “wet blue” exports • In furniture, unreliable supplies of timber: Kenya has a significant wood deficit
Million m3/a
42
24
Total demand
11
16.6
Industrial wood harvested for fuel
1.4
Industrial wood Average annual deficit harvested for furniture
6. Low productivity is pervasive, given rudimentary technology and limited managerial and technical skills • Technology is outdated and expensive to replace • Skills are low, training is not readily available, and the Training Levy is reportedly ineffective.
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7. Bulk of employment is in the informal sector, where labor productivity is dismal • In leather, 4,000 formal vs. 10,000 informal workers • In timber-furniture, 160,000 workers total, of which in manufacturing, 10,000 formal vs. 115,000 informal • Informal sector characterized by: -
Limited tools and mostly “on the job” training
-
Low value-added goods
-
Jobs that are not high quality
Employment in the furniture industry
No. of people employed Value added per worker per yr
14
Formal sector
Jua Kali sector
9,000-10,000
115,000
USD 2,300
USD 609
8. Difficult access to markets means growth is illusive Domestically
Regionally
Internationally
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9. Cheap and/or higher quality imports threaten locally manufactured products imports have displaced local mkt almost entirely • For furniture, imports
Kenyan Market Share of Footwear by Point of Distribution Pairs of shoes sold (millions)
• For leather and apparel
30
10 0 2nd Hand‐ Mitumba
USDm
already 13% of market
New‐Low Cost New‐Mid Cost New‐High Cost
Value of Kenyan furniture imports (USDm) 80
growing fast and
Non‐Leather Leather‐imported Leather‐Kenyan
20
60
Import CAGR (2009-2013) = 24%
40 20 0
share
2009
2013
Unit values of trade in upholstered chairs KSH/Unit
16,000
16
China to Kenya
12,000
Malaysia to Kenya
8,000 4,000 0 2008
2009
2010
2011
2012
2013
Table of contents 1. Mandate and methodology 2. Structural similarities across sectors 3. Kenya’s positioning and cross-cutting recommendations 4. Conclusion
Business case for the Kenyan manufacturing sector - I 1. Strong local and regional demand fundamentals 1 2. 2 Access to markets 1. Strategic location 2. AGOA 3. 3 Regional power with sophisticated private sector 4. 4 Growing services sectors that can support and strengthen manufacturing 18
Business case for the Kenyan manufacturing sector - II
1. 5 Availability of raw materials mean possibility of integrating value chains 2. 6 Large labor force with pool of skilled workers, relative to neighbouring countries 3. 7 Unique African design 4. 8 China is no longer low cost due to rising wages
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Cross-sectoral recommendations 1
Improve the business environment • Develop and deepen networks of regulation, facilitation, skills, and infrastructure
2
Remove market distortions that undermine competition • Intervene in protective dynamics and legislation that distort power towards upstream stakeholders
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Cross-sectoral recommendations 3
Improve productivity and innovation • Labour productivity - Enhance the quality & availability of managerial and technical skills through more and better on the job training - Rethink existing Training Levy • Investment in technology, machinery and facilities: provide incentives for upgrading machinery and facilities at firm level
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Cross-sectoral recommendations 4
Increase access to markets and induce greater demand • Promote exports in regional and international markets by increasing regional and international awareness and coordinating branding efforts • Establish Jua Kali-focused marketing entities to facilitate access to formal markets • Improve transparency and implementation of public procurement
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5
Enhance institutional collaboration and support at sector level0
• Establish new / strengthen existing industry associations to give sector a voice • Enhance cooperation across and within each value chain • Leverage association to facilitate data collection, training, and marketing initiatives
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Table of contents 1. Mandate and methodology 2. Structural similarities across sectors 3. Kenya’s positioning and cross-cutting recommendations 4. Conclusion
Conclusion • Manufacturing has the potential to be a cornerstone of the economy in terms of job and wealth creation, but GoK and the private sector needs to take action to ensure its growth and development • Given commonality of challenges, it is best to complement vertical interventions with horizontal policy interventions to address cross-cutting constraints 25