5 March 2018

Kenya: Uhuru Kenyatta's Big Four Agenda - Achieving Greater Manufacturing Capacity Within a Short Time

opinion

This is my final take on President Uhuru Kenyatta's "Big Four" legacy agenda. Today I focus on manufacturing.

Among African countries, Kenya has a well-diversified economy and as such has a significant potential of becoming an industrial powerhouse in sub-Saharan Africa.

That potential has, however, been elusive. Politics and governance are to blame for the missed opportunity.

Manufacturing's contribution to GDP drops every time Kenya is in an electoral cycle. The same also happens to overall GDP growth in the country.

This perhaps explains why since 1980 manufacturing's contribution to GDP has for the most part been erratic and stagnating for 10 years before significantly dropping in the 1990s to below 10 per cent. It seemed to have recovered in 2005, rising to a high of 15 per cent in 2010 but dropping yet again to 9.2 per cent in 2016 (see figure 1 below).

The President's renewed effort to revive the sector is commendable and doable.

Already, there are low-hanging fruits to enable him to propel the sector beyond the 20 per cent mark within the period of his final term in office.

FOUR KEY AREAS

Manufacturing is an area in which we have learnt a great deal from our past mistakes. It is also one sector that was prioritised in Vision 2030.

In my view, the President needs to pick four key areas: textile and other light manufacturing (leather, food and beverage processing, pharmaceuticals); chemicals and petrochemicals, leveraging the oil find to start the manufacturing of fertiliser and other downstream products; light electronic manufacturing; and green energy production, especially in drier areas with enormous amount of sunshine.

These areas that I have proposed are complementary to the achievement of other agenda items, such as affordable healthcare, food security and even affordable housing.

Further, these are the areas with the greatest potential for pulling along our folks in the rural areas through the trickledown effect they bring. I need not repeat here that we still experience more than 40 per cent waste of all our food production.

Processing some of this waste will delay consumption and guarantee the country food security.

Fruits and vegetables (read mangoes from Tana River, Kitui and Makueni; avocadoes from Kisii, Murang'a, Meru, etc.) in several parts of the country go to waste due to lack of processing capacity.

Many of these fruits can be turned into concentrates for export or stored for sale during off-season to maximize farmers' income potential.Textile could now be booming in Kenya had we developed a better strategy of separating politics from essential economic interventions.

EXPORT PROCESSING ZONES

There is no secret that politicians invaded the export processing zones and allocated land that was earmarked for purposes of enticing investors. Instead, they kept the land for themselves for speculative purposes.

As a result, foreign direct investment into the sector dropped significantly to the extent of undermining capacity development that was underway.

Key industries like Rivatex and Kicomi collapsed in the process. The cotton industry followed for lack of market.

Today, disease-resistant cotton varieties are available. Their adoption could revive the sector and greatly benefit poor farmers. Some ginneries like the one in Makueni are underutilised.

Yarn processing is largely a cartel that the government needs to liberalise and support small and medium enterprises (SMEs) to join this lucrative sub-sector while the American Growth Opportunity Act (AGOA) is still in force.

Reviving the Mombasa oil refinery will possibly give rise to downstream manufacturing enterprises.

It does not make sense in this day and age for Kenya to be importing plastic tableware from China when we have the raw materials.

China is ceding low-end manufacturing of light electronic products. The market for these products is in excess of one trillion dollars, which market India is gearing to monopolise. Ethiopia's efforts to venture into this area have paid off. Today, the country controls more than 25 per cent of the feature phones sold in Africa. The Korean Advanced Institute of Science and Technology (KAIST) and Samsung have expressed interest in setting up a training facility and manufacturing activity in Konza.

TAX INCENTIVES

The government must extend as many tax incentives as possible since it forms the basis of building enough capacity locally.

At the same time, we must encourage investment in green energy as much as possible. Soon the country will be energy-deficient if plans for industrialisation move on smoothly.

Most of these interventions that I suggest do not even require much thinking because the machinery is readily available and the labour is plenty. But it does require creation of small cooperatives and a financing mechanism to acquire machineries like food processors, driers, textile equipment, etc.

The idea of consolidating several development funds into one bank is brilliant. However, it must be run differently. In particular, the bank must demonstrate that it has internalised emerging lending models that are favourable to the needs of SMEs.

Traditional banking has failed this country with its rigid one size-fit all lending strategies.

There is wisdom in using big data to determine lendable people rather than treating every customer as a suspect who will default.

Others may argue that Kenya can manage heavy industry manufacturing but the fact remains that the country's workforce is still weak in competitiveness at the moment.

It will require more than 10 years on the learning curve before Kenya has workers who can compete globally in both cost and efficiency.

As such, the country needs to embark on skills development while exploiting the areas where it has some level of skills sufficient to mount a significant assault on other established countries.

Furthermore, most of the products from the proposed industries above will find market locally.

MANUFACTURING STRATEGY

While delivering on the low-hanging manufacturing products, the country must develop a long-term manufacturing strategy.

In their Harvard Business Review article titled "Beyond World-Class: The New Manufacturing Strategy," Robert Hayes and Gary Pisano explain how "manufacturing strategy can no longer confine itself to guiding short-term choices between conflicting priorities like cost, quality, and flexibility. Nor can managers limit themselves to choosing which faddish improvement technique to adopt or which company to emulate. Long-term success requires that a company continually seek new ways to differentiate itself from its competitors. The companies that are able to transform their manufacturing organizations into sources of competitive advantage are those that can harness various improvement programs to the broader goal of selecting and developing unique operating capabilities."

Kenya therefore needs to decide which manufacturing strategy to adopt in order to become a more competitive nation.

But more importantly, the country must embrace the concept of continuous improvement as suggested above.

Many have argued that Kenya should compete as a low-wage area but research dismisses this type of strategy since other competitors (and there are many in sub-Saharan Africa) can very easily adopt it and complicate the long-term manufacturing strategy of the country.

As such, we must look beyond low-wage advantage and equip our labour with exceptional skills in order to compete more effectively.

The strategy must recognise that we do not have enough time to dilly-dally on issues of industrialising the country.

Skills development is imperative in a developing economy in this time of rapid technological change.

ENCOURAGING LIFELONG LEARNING

We must encourage lifelong learning to make our people more competitive in the global stage. Many of the young in colleges have the mind-set of employment after college.

As such, focusing on employability skills could give the country some room to develop future entrepreneurs.

However, the strategy must look for areas that can be exploited by the many young people in the country and develop a national skills needs for the next 30 years.

In the meantime, there is a need to build enterprise incubation centres as well as makerspaces to encourage the development of future entrepreneurs.

This must be coupled with incentives to develop SMEs with a potential to scale. A tax break for at least five years after formation may be sufficient to encourage young people to venture into saleable enterprises.

It is possible to begin realising greater manufacturing capabilities within a short time to enable the President to achieve his short-term objectives while we seek to put the country firmly on course to play a part in the emerging fourth industrial revolution through effective skills development.

Affordable housing, healthcare and food security will demand far greater resources than manufacturing will ever need to succeed.

Implementers of manufacturing simply needs to be smart, focused on small and medium enterprises and provide lots of incentives.

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

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