BY DAVID ONJILI
“If an African Man cannot even provide a basic meal of ugali and chicken on Christmas day for his family, then what is the worth of working?” Joseph Onyango, a piece rate motor vehicle assembler posed to the management of Kenya Vehicle Manufacturers (KVM) in Thika when the management had ruled that the entire working force made up of permanent and piece rate employees at the plant had to break for the December Festivities on 8 and resume on January 15 the following year without any pay.
With house rent and other personal utilities to be settled as the breadwinner of his family, this was the general concern for Mr Onyango and many of his assembled colleagues as it painted the harsh reality that such models of employment hurt members of staff.
Whereas reason later prevailed that day and the management decided to give each employee on piece rate an advance of Sh8, 000 which was to be deducted starting February the following year in 3 equal monthly installments, the precarious life and employment model of piece rate employees was self-evident especially in an industry where the volume of work is declining and needs government intervention.
Motor vehicle assembly in Kenya
The three major motor vehicle assemblers in Kenya as at 2016 by market share are General Motors East Africa (GMEA), Associated Vehicle Assemblers (AVA) in Mombasa and Kenya Vehicle Manufacturers (KVM) in Thika. There has been an interest by county governments who have been lobbying investors to put up assembling plants in their regions and of note is Machakos County who signed an agreement with Ashok Leyland in February 2016 to set up a plant by the end of 2016 but which to date has not materialized although reliable information shows it could happen.
Commercial vehicles are the main ones assembled in the country. A report conducted by Deloitte Africa on motor vehicle assembly in Kenya in 2015 shows that close to 10% or 921 of the 9295 vehicles assembled in Kenya are light commercial vehicles such as pick-up trucks while the rest are heavy commercial ones like trucks and buses.
Locally assembled vehicles are assembled mostly from Completely Broken Down (CKD) kits, which are defined as a package of most or all of the individual parts of a vehicle as separate pieces. These pieces are usually brand new from their country of origin. While on other instances vehicles are assembled as Semi Knock Down (SKD) where car parts that are partly put together are imported into the country and are finally put together in readiness for sale.
Insights from players in the industry
When in 2016, GMEA recorded total automobile sales of 4,858 units out of 13,869 or 35% of the total car sales in Kenya, a drop from a previous sale of 6,690 units in 2015, the alarm bells started ringing. Being the face of the industry, the panic was understandable. A sit down with players in the assembly industry is eye opening. KVM, for instance, talking to the Nairobi Business Monthly reveals they went five months in 2015 without assembling a single car and only managed to assemble 130 cars in the entire year from an assembly potential where they would assemble close to 100 Land Rover cars previously. It is clear that this is an industry that is suffering big time. That while we focus on the big players, the smaller ones are suffering and it raises questions on the viability or even the logic of county governments like Machakos setting up their own assembly plants if we cannot establish and fix the cause of such a dip in production and sales.
It must also be put in context that FOTON East Africa that had set up an assembly plant in 2013 in Mlolongo had already shut the assembly line almost 2 years after it began operations and sending close to 30 of her employees home on redundancy.
Despite all this, our sources from the motor vehicle assembly industry that spoke on condition of anonymity since their respective company policy does not allow them to comment on industry related issues see several measures being undertaken by both the industry players and the Government of Kenya as key to the stability or otherwise of the industry.
A case in point is the government legislation that surrounds the locally assembled vehicles. A locally assembled vehicle, for instance, is exempted from several taxes. It does not, for example, incur the 25% import duty and is also exempted from excise duty of 20%, which at one time was put at a flat rate of Sh150,000.
By exempting them the above taxes, it lowers the operating costs compared to the cheap second hand cars and thus makes them competitive in pricing considering that the assembled cars too are brand new with zero mileage.
In the year 2015, the government introduced a flat rate of Sh150,000 on all vehicles imported and locally assembled. This brought about a huge outcry amongst second hand car dealers in the country as it cut into their profits especially those who were selling low-end cars as opposed to the high-end cars, leading to a huge number of car importers opting to bring in the high end cars to maximize on profits.
A vehicle assembler with a chassis worth Sh9m was comfortable in paying the flat rate of Sh150, 000 then as opposed to a vehicle importer of a low end vehicle worth Sh600, 000 as it ate more into the latter’s margins as opposed to the former. This flat rate was brought in to replace the 20% excise duty that had earlier been charged on locally assembled vehicles. Using the same chassis worth Sh9m, we see the assembler would pay (0.2% of 9,000,000) which would be Sh180, 000 or Sh30, 000 more than the flat rate imposed by the government. After the huge outcry by second hand motor vehicle sellers, the government did buckle, and substituted the flat rate with 20% excise duty for imported cars while abolishing the tax completely for locally assembled cars in November 2016 a move that assembly industry players applaud.
Government involvement in the industry
President Uhuru opened the Volkswagen model’s production line hailing it a significant boost to the east African nation’s revamping industrialisation efforts. / AFP PHOTO / TONY KARUMBA
In December 21, 2016 President Uhuru Kenyatta launched the assembly of the VW Polo Vivo, a product of DT Dobie that was making a comeback in the motor vehicle assembly after four decades. While the President underscored his commitment to help the manufacturing industry in the country by citing how his government had removed excise duty of 20% on locally assembled cars, industry players believe that the government should do more to help it.
While questions abound on to what market research locally informed the decision to settle on the VW Polo Vivo model, DT Dobie appear intent to ride on the success of the same car model in the Sub Saharan Region.
The President also challenged county governments to purchase the model and promised to see to it that government ministries made orders for the car. He linked the project to the government’s Industrialization Programme which is in line with the Vision 2030 blue print that seeks to transform Kenya into an industrialized middle income economy providing high quality life to its citizens. Yet, a genuine question lingering was how production of a few such models would enjoy economies of scale to make it viable.
DT Dobie brand CEO Mr Herbert Diess notes that the VW Polo Vivo would retail at sh1.6 million and buyers would be given a 3 year warranty and those apprehensive about servicing the car should relax because the three-year warranty include a monthly service fee of Sh2, 750 for the next three years.
A look at South Africa reveals that their government gives a non-taxable grant of 5% to firms that maintain their base year employment figure that states that firms should also maintain around 50,000 units annually in quality. Currently, South Africa produces around 600,000 units annually and Multi National firms like BMW, Ford (Incorporating Mazda), Mercedes Benz and Nissan all have assembly plants there and even components manufacturing companies like Senior Flexonics and Corning have all set up bases in SA as tier one suppliers.
In India, their government does not import any foreign manufactured cars; this is in an effort to ensure that locally manufactured ones get first priority in the market.
Yet, the irony in President Kenyatta launching the assembly of the VW Polo Vivo and waxing lyrical is that his own government had entered in a car leasing deal in 2013 with Toyota Kenya where the National Police Service received 1200 cars, the police drivers were to receive training, fleet management from Toyota and after sales service countrywide from the vast Toyota network in the country. This is a vision he had as Finance Minister in 2010 when he brought up the idea and finally fulfilled it as President. The near doublespeak raises questions about the President and his administration’s commitment to the assembly of cars locally. If the industry is to thrive, the President must walk the talk by ensuring government are customers to the assemblers especially on the economic saloon cars
Government through the Ministry of Industrialization have championed proposals in the Policy Framework for Motor Vehicle Assembly in Kenya to complement the National Industrialization Policy Framework of 2016 through the following recommendations;
• Impose a 2% tax on all imported FBU (fully built units)
• Create Automotive Innovation Fund to support research and the sector development
• Include the sector in Special Economic Zones, with the SEZ bill passed in 2015.
• Producers in the Special Economic Zones are afforded a ten-year tax holidays, low utility rates and export credits.
• Create a National Automotive Council, equipped to address matters relating to the assembly industry.
Completely Knocked down (CKD) over Semi Knocked down (SKD) cars for local assembly
While acknowledging that the entry of the VW Polo Vivo into the market is a step in the right direction as Hyundai motors and Peugeot are both keen to start the assembly of their saloon car models, it does not escape scrutiny that the VW Polo Vivo comes from South Africa as SKD, i.e. upholstery and fabricating the body are not done in Kenya. There is a plan that in four years, the entire model arrives as a CKD because that way, it increases the chain of operation from the body shop where welding, riveting and paint are done and finally dropped to the assembly line for the assemblers to work on the chassis. This creates a good and steady flow of work and in turn, assemblers will employ more staff.
GMEA and AVA in part have an edge over KVM in that they assemble and sell their own cars while KVM assemble cars on contractual basis and own none of the models they assemble. The chain of events when a CKD car is to be assembled is elaborate and creates several jobs as opposed to the SKD, which can employ as many as only five individuals. When the CKD parts arrive, the chassis undergoes stages like riveting and welding, painting and body shop before the entire car is assembled and all these specific processes do employ several individuals up to the pre-delivery inspection unit. The more CKD units we assemble the more work is needed and subsequently the more employees that will be employed
Tier one and Tier two suppliers
A tier one supplier is defined as that company that provides/supplies an Original Equipment Manufacturer (OEM) directly with components. An OEM is a company that makes final products for the market place and examples include the assembling plants like GMEA, AVA and KVM. While the CKD parts will be shipped from the parent company of the car that is being assembled, the model of South Africa where companies like Senior Flexonics and Corning are allowed by multi nationals like Nissan after licensing to provide parts like headlights, seats and locks for them is something that can be done in Kenya too.
If VW Polo Vivo and any other company car brands assembled in Kenya do this, it not only makes sense that the locals after meeting the manufacturer’s standards are allowed to sell to the assembler car parts like seats, head lights and floor mats rather than having to import these parts . This can be achieved by having these tier one suppliers located within a radius of 100Km from Thika town to serve KVM and for the case of AVA in Mombasa a similar model copied and at GMEA too. The ripple effect of this is that we have a good number of these suppliers and thus create jobs and we can also export some of the supplies to neighbouring countries.
On February 15, 2017 the president of Mercedes Benz United States International (MBUSI) in Tuscaloosa Alabama, USA led staff and members of public in celebrating 20 years since the plant assembled its first car, Mercedes M Class SUV, that was assembled by 850 individuals, this was a great milestone as 2 decades later they employ 3500 people directly and close to 10000 indirectly. The model of complete assembly from the ground up (CKD) adopted has been the main reason for this and will only be wise if Kenya adopts the same for all the assemblies, existing and new ones to be opened. More important is the number of tier one suppliers that have come up in the area of Tuscaloosa, Alabama like Magna International, Randstad Engineering, Kamtek, and SMP and Lear.
While the government has to strike a balance and not chase out enterprise, the same government must also see to it that jobs are created for its citizens. By encouraging the assembly of vehicles in the country and not dwelling on the heavy commercial ones only, we can grow the economy and partner with the automobile manufacturers to train our labour force with enough technical skills to meet the assembly standards that are required in the industry. While the industry experiences a turbulent period, the government must come to its aid by being a major customer and also passing policy that can help Kenyans acquire finance to purchase such cars through the several banking institutions. This will also reduce pollution of air by older cars that are usually imported by second hand dealers.
To mitigate the occurrence of piece rate employees like Onyango, we have to be clear that the Employment Act 2007 and the Regulation of Wages and Conditions of Employment Act 2007 expressly state that a Contract for specific task (piecework employment) is terminated upon the completion of work, assemblers like GMEA and AVA have an edge over KVM in that due to their market share dominance and consistent volumes of work they can offer longer e.g. one or two year contracts as opposed to contracts of specific work.
