Chinese manufacturers go local in battle for Kenya’s consumers

Monday, 11 Apr 2011

Chinese manufacturers are setting up local production plants, signalling a change of tack in the battle for control of Kenya’s consumer market they have been serving through direct imports.

The Asian giant -- popularly known as the world’s factory because of its mass production models that have won it a large fraction of global trade in manufactured goods -- has been quietly gaining a manufacturing foothold in Kenya, in a move that is expected to add competitive pressure on old players.

Chinese companies have in the past five years alone established a strong local presence in Kenya’s telecoms infrastructure, automobile, battery, food and beverage markets cutting down the dominance of subsidiaries of western multi-nationals.

China’s economic engagement with Africa has in the past two decades been defined by natural resource extraction and importation of raw materials to power factories that produce industrial goods for export.

The change of tack in favour of local production is not only expected to create thousands of jobs for young Kenyans but also escalate the battle for control of East Africa’s rapidly-growing consumer market that is also being eyed by Western companies.

Kenya Investment Authority (KIA) says at least 18 Chinese companies have set up shop in Nairobi in the past two years targeting diverse markets such as footwear, consumer electronics and beverages with an initial investment cost of over Sh7 billion.

Foton Motors, the vehicle manufacturer that is putting up a Sh1.2 billion assembly plant in Nairobi, battery maker Golden Lion, and technology firms ZTE, Huawei, and Aucma top the list of Chinese firms with a strong presence in the Kenyan market.

"The Chinese are confident that setting up local operations can reduce costs and help them reap the fruits of growth in demand that is expected to come with the integration of East African economies," said Prof Kieyah of the Kenya Institute of Public Policy Research and Analysis (KIPPRA).

Two decades of aggressiveness and fast growth has seen China overtake Japan as the world’s second biggest economy mid last year with a number of forecasts indicating it could topple the US from the top spot by 2025.

In Kenya, the surge in Chinese FDI should help boost the country’s thin industrial base, increase export volumes and help the shilling gain stability in the forex market.

It could also introduce the Kenyan consumer to a wider variety of goods that should help tame rapid price escalation.

Consumer market surveys have shown that the relatively cheap Chinese goods have gained popularity across Africa, especially among the low-income households that are exposed to inflationary pressure from the turbulence in commodity prices, including crude oil and cereals.

The Sh1.2 billion Foton assembly plant is, for instance, set churn out 10,000 units of prime movers, tippers, buses, pick-ups, and light commercial trucks per year - that will be priced lower than Western and Japanese brands like Mercedes, Mitsubishi and Toyota.

Chinese investments are also set to benefit the local economy in terms of technology and skills transfer adding impetus to Kenya’s industrial development.

Locally-based Chinese firms are expected to increase rivalry with their Western counterparts who have over the years lost major public and private contracts to the newcomers.

Chinese companies have expanded their economic footprint in Kenya since President Kibaki came to power in January 2003, riding on the government’s deliberate decision to look East for new investments and aid.

During the past eight years, Chinese companies have won major contracts in oil exploration, communication, infrastructure, and military projects at the expense of previously dominant Western multinationals.

Star DTV, for instance, won the contract to roll out the country’s digital TV transmission network while the government has in the past three years turned to China for supply of multi-million shilling military hardware.

Kenya-China’s trade has more than doubled to Sh77 billion in 2009 from Sh24.2 billion in 2005, with Chinese imports accounting for most of the trade.

Chinese firms are also staging more coups in the private sector, edging out Western technology giants like Ericsson, Alcatel-Lucent and Nokia in telecoms infrastructure deals.

ZTE Corporation has recently signed a Sh4 billion contract with Telkom Kenya to roll out the firm’s third generation (3G) network following in the footsteps of Huawei, another Chinese technology firm, is involved in Safaricom’s Sh10 billion 4G rollout.

Rivalry is also expected to intensify in the automobile sector where Foton is bracing for vicious fight with Mercedes, Mitsubishi, Isuzu, Nissan, and Toyota brands sold by CMC, Simba Colt, DT Dobie, General Motors, and Toyota.

The growth of Chinese economic clout in Kenya has caused disquiet in Western countries, with US ambassador to Kenya Michael Ranneberger being quoted in leaked diplomatic cables expressing resentment at growth of Chinese products in the local market that are shrinking market share of American companies like Eveready East Africa.

Chinese companies are coming to Kenya with an aim of penetrating the larger East African market where demand for goods and services is growing.

The EAC market, which last year came under a common market, has a population of 130 million people whose incomes are rising across board.

The removal of barriers to movement of people, goods, and services in the region is attracting more foreign investments, with Kenya gaining from its strategic position as an infrastructure, transport, and financial services hub.

Chinese investments in Kenya are in particular being driven by their government’s support of their expansion outward through credit support and relaxation of rules restricting capital outflows.

Since 2006, the Chinese government simplified capital outflow rules, reducing, for instance, the minimum loan a parent company in China could lend its overseas subsidiary from $5 million.

This saw China’s investment outflows more than double to $52.1 billion in 2008 from $21.1 billion in 2006, according to data from United Nations Conference on Trade and Development (UNCTAD).

The shift in China’s investment strategy is also being pushed by the growing costs of production in China due to higher labour costs and rising inflation, changing its previous standing as a low cost producer.

In the past two decades, American and European multinationals have pumped billions of dollars into China seeking low cost production brought by China’s relatively cheaper labour.

But this has in turn led to a rise in China’s middle class who in the past two years have staged strikes and go-slows that have pushed up salaries, eroding China’s cheap labour status.

Credits: VICTOR JUMA/Business Daily