New vehicle sales in the Kenyan market slipped 30 percent year on year to 13,869 units in 2016 from a peak of 19,996
units a year earlier, according to the Kenya motor Industry association (KmI). This is the first time sales have slipped since 2009, underlining the unique challenges that charac- terised the industry in the past year. according to industry data from
the KmI, all new vehicle dealers— with the exception of Nissan dealer, crown motors—registered a decline in sales in 2016.
General motors East africa recorded a decline in sales from 6,690 units in 2015 to 4,858 units last year. The dealer of Isuzu commercial vehi- cles and chevrolet vehicles, however, retained its leading market position with a 35 percent market share in 2016, a modest increase from 33.5 percent a year earlier. Nevertheless, GmEa’s increase in market share was primarily a function of a decline in the unit sales of its peers.
Toyota, GmEa’s closest competi- tor, saw its sales fall to 2,778 units in 2016 from 4,151 units a year earlier. The dealer, which sells hino com- mercial vehicles, recorded a slip in its market share, from 20.7 percent in 2015 to 20 percent last year.
The same trends of lower sales and lower market share were con- sistent across the industry. Sellers of BmW and mitsubishi commercial vehicles, Simba corporation, saw its sales drop to 2,343 units in 2016 from 3,430 units a year earlier. This slashed its market share to 16.8 from 17.1 percent.
cmc motors, which was del- isted from the Nairobi Securities Exchange in February 2015, saw its sales decline to 970 units last year from 1664 units in 2015.
It now has a market share of 6.9 percent compared with 8.2 percent in 2015. cmc, which sells maN and Ford utility vehicles, underwent a strategic shift in 2016 that saw it hire a new managing Director and sharpen its focus on the PSV market In mid-2016, cmc poached for
mer hino (Toyota) General manager Wanjohi Kangangi, for the position of managing Director. mr. Kangangi led the team that launched hino in Kenya, helping it cement its position in the PSV market. as the managing Director of cmc, he is expected to leverage on his experience with hino to favourably position cmc’s German-made maN buses in the PSV market.
The only major player that recorded an increase in sales last year was crown motors, which reported an uptick in sales from 604 units in 2015 to 741 units last year. crown, which acquired the Nissan franchise from DT Dobie in 2014, had a market share of 5.3 percent in 2016 compared to 3% a year earlier. meanwhile, DT Dobie, seller of Jeep SUVs and mercedes trucks, saw its market share decline to four per- cent from 4.4 percent a year earlier. DT Dobie sold 568 units last year, down from 879 units in 2015.
The drivers of this lackluster perfor- mance, dealers said, was the general slowdown in economic activity and the imposition of excise taxes on
assembled vehicles for the better part of last year.
The issue of taxation was par- ticularly impactful on performance. The government introduced a flat excise tax of 150,000 on cars in 2015 but after much lobbying from used car dealers scrapped this off in favor of an excise tax of 20 percent of a car’s value, which came into effect in mid-2016.
This excise tax of 20 percent of car’s value has dealt new vehicle dealers a fatal blow as the value of new cars is generally higher than used cars, meaning that the tax bur- den is higher in terms of the actual amount paid to the exchequer.
In a media statement, Dinesh Kotecha, a director at Simba corporation noted that “the excise duty hurt the industry.” The excise duty inflated the prices of some commercial vehicles by up to Sh1.2 million, making them uncompetitive in the market. Furthermore, lower economic activity, especially in the construc- tion sector, affected demand for com- mercial vehicles last year. This had an impact on overall new vehicle sales, considering that commercial
vehicles account for 86 percent of all new vehicle sales in Kenya. In con- trast, only 14 percent of new vehicle sales in Kenya are SUVs and Sedans. Data from the Kenya National Bureau of Statistics (KNBS) relating to the third quarter of 2016 indicates that during this period, the construc- tion sector grew by 9.3 percent com- pared to 15.6 percent growth in the same quarter of 2015. This decrease in growth has been reflected in the decline in cement consumption over
the same period.
The performance of the new vehicle market is pegged to the performance of key sectors of the economy such as construction. This means that performance may also be depressed this year in light of the projected downturn in invest- ment activity due to perceived risks around the elections.
With the first phase of the Standard Gauge railway drawing to its completion, and other key con- struction projects being postponed in light of economic headwinds, the outlook for demand for commercial vehicles such as trucks and pick-ups remains bleak.
meanwhile, the impact of lower sales of new vehicles will contin- ue to rear its ugly head on play- ers in the sector. This is especially true for assemblers of trucks, buses and other commercial vehicles. The negative effects will become visible once analysts revisit industry per- formance for the first and second quarter of this year.
Impacting industrialisation Lower demand for commercial vehi- cles has compelled many assemblers to downsize. This has not only led to job loss, but also adversely affected capacity utilisation in Kenya’s
vehicle assembly plants. Kenya has three vehicle assem- bly plants—General motors East africa’s Nairobi plant, associated Vehicle assembler’s mombasa plant, and Kenya Vehicle manufacturer’s Thika plant.
all three plants are currently operating below capacity. moreover, they have in the past year been compelled to lay off workers due to the continued decline in demand for commercial vehicles in the market. Lower demand means fewer number of assembled units—hence the need for a leaner work force.
These developments have put the country’s industrialisation ambitions into jeopardy. For instance, in the first five months of 2016, assemblers laid off 415 workers.The job cuts are expected to escalate in view of the persistent difficulties in the market.
Similarly, capacity utilisation in the first half of 2016 was 20 percent, compared with 33 percent in 2015 when new vehicle sales reached a peak. This is according to data from the Kenya association of manufacturers, which has raised concerns several times that the decline in vehicle assembly could impact the country’s industrialisa- tion prospects. Other industry ana-
lysts, including Dr. hanningtone Gaya hold that Kenya has no econo- mies of scale advantages to assembly vehicles locally and avail them at competitive prices.
Low capacity utilisation affecting all Kenyan assembly plants; Source: Deloitte; africa automotive Insights The low capacity utilisation essentially means that the automo- tive sector is not creating as many jobs as it ought to. If this persists, the results could be dire considering that the country is currently faced with an unemployment rate of up to 40 percent, according to the World Bank. majority of the unemployed are youth who form 35% of the 48
Job creation in the automotive sector will not only stem unemploy- ment, but also lead to knowledge transfer and a general improvement in the quality of human capital. This will make Kenya more competitive than its peers and ensure that for- eign direct investments flow into key sectors such as manufacturing.
moreover, vehicle manufacturers in markets such as Germany are looking for low cost destinations to outsource assembly. most German automobile manufacturers today manufacture intermediate goods— that is, car parts—and then export them to other markets with lower costs of labour for assembly.
It is telling that German auto- maker Volkswagen reopened its assembly plant in Thika in late 2016 after a four-decade hiatus. The auto- maker also has plans for rwanda, underlining its preference for assem- bly hubs with low labour costs. If the slowdown in vehicle assembly in
Kenya persists, the country stands to lose out on similar opportunities from other manufacturers.
Deloitte warns that: “Kenya’s automotive sector is relative- ly stagnant and runs the risk of being side-lined in the long term by other regional players such as Ethiopia, which has a more progres- sive approach to industrialisation.” Ethiopia has a huge population of close to 100 million—the second most populous country in the con- tinent—and offers affordable labour. This is an incentive that may prompt assemblers to shift to Ethiopia.
according to Deloitte, certain policy interventions are necessary to turn around the fortunes of new vehicle dealers (particularly assemblers) in Kenya. Key among these is “decreas- ing the age of (used) cars allowed for import while simultaneously decreasing the affordability of these cars by increasing the taxes levied on them.” This will drive the sales of locally assembled cars. however, according to Dr. Gaya, Deloitte’s position is based on industry naivety as the two markets, new and used car, cater for different social econom- ic classes. New car prices in Kenya is far beyond the means of many households and small businesses, who are left to fend for themselves in the used car market. Tellingly, around 80 percent of the Kenya’s total vehicle fleet is used cars, mainly from Japan.
although this proposed policy intervention is good on paper, in practice it is not that easy to imple- ment. Used car dealers offer the best prices given the GDP per capita in Kenya of $1246.Whereas the cheap- est new car in the Kenyan market retails at around Sh2.5 million, used cars are priced as low as Sh700,000. The used car market has helped meet the demand for personal cars such as SUVs and Sedans from the
emerging middle class in Kenya.
Furthermore, clamping down on used car dealers could put many out of jobs. although used cars are not locally assembled, they still create employment opportunities, especial- ly in the Jua Kali sector where many are earn their daily bread from the used car industry. a good percentage of workers in the Jua Kali sector are direct beneficiaries of Kenya’s expansive used car market. From the mechanics; painters; metal workers; designers of cushion; parts salesmen; electrical workers and so on.
The used car market and the new car market can exist side by side, posits Dr. Gaya. rather than promoting one at the expense of the other, policy interventions can aim at making the new car market, particu- larly vehicle assembly, more viable.
The first area of focus would be lowering the cost of doing business for assemblers.
This entails offering tax breaks, but also reducing the cost of ener- gy, which is a key concern across the broader manufacturing sector in Kenya. at $0.11 per kilowatt hour, the cost of energy in Kenya is close to three times higher than neighbouring Ethiopia’s, which has gained a lot of traction in manufacturing. Ethiopia’s cost of energy is $0.04 per kilo- watt hour, one the lowest on earth. Ethiopia is threatening to supplant Kenya’s profile as the region’s fore- most manufacturing hub.
The long-term solution to the challenges facing new vehicle dealers, specifically assemblers, is to ensure that there is a steady growth in wages as well as an uptick in for- mal employment, which presently accounts for barely 20 % of the total workforce. This will boost demand for personal cars and wean the sec- tor from dependence on commercial vehicles. People in formal employ- ment are generally more eligible for a wider range of flexible financing options from banks and financial service firms. Therefore, if the num- ber of formally employed people increases, affordability for locally assembled cars will also increase. This means that the government also has a role to play in terms rejigging the economy to give the formal sector a more prominent place.