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understanding Kenya’s used car market

Kenya is africa’s biggest importer of used  cars  and is ranked the fourth  larg-  est    market    globally     for
the lucrative Japanese used cars, according to data from Japanese used Motor Vehicles Exporters association   (JuMVEa).   JuMVEa was established on september 14, 1995 and formerly recognised by the Ministry of International trade and Industry of Japan on June 1  1997.

the purpose of  JuMVEa  is,  to exchange information, establish order of fair trade in the used motor vehicle industry, and endeavor for- ward the sound development of the used motor vehicle business. JuVEa therefore fights illegal exports especially of stolen cars, rebuilt or remodeled. JuMVEa represents standards and nurtures importers trust, including establishing a secure payment service that protects both buyers and suppliers, including qual- ity. this makes Japan Kenya’s main supplier of safe and quality used motor vehicles.

 

Key developments

Monthly imports of cars in Kenya are expected to rise to an average 9,000 units for the remainder of the year, up 80 per cent from an average of 3,000-5,000 units a month in the first half of the year. this is accord- ing to the Car Importers association of Kenya.

“We expect volumes to grow in the next six months. this  will  also be a plus for the government as it will get more revenue,” Car Importers association of Kenya chairman, Peter Otieno, said. “We expect the monthly imports to go as high as 12,000  units,” he  added. this   posi

tive sales forecast follows an amendment in tax legislation that will see cars valued below sh1 million cost less after the gov- ernment revised the formula used to calcu- late excise duty in a review that will make fuel guzzlers—which comprise a small part of used car dealers’ product portfolio— more expensive.

the government has abandoned the duty of sh200000 for vehicles older than three years and sh150000 for newer ones (imposed in December last year), in favor of  a  20  per  cent  levy  of  the  car’s value(imposed  July  this year).

the introduction of the flat rate in December had been criticized by sector players, who lamented that it raised the prices of small vehicles, popular with the middle class and sMEs, while reducing the cost of fuel-guzzlers. “this (sh200000 flat levy) has been perceived to be unfair, inequitable and punitive to importers of vehicles commonly imported by low income earners but beneficial to importers of luxu- rious vehicles,” said Henry Rotich, treasury Cabinet secretary, in his Budget speech for the fiscal year beginning July.

“In order to address the situation, I pro- pose to amend the Excise Duty act, 2015 to remove specific rate of duty and introduce ad valorem rate of 20 per cent based on the value of the vehicle,” added Cs Rotich.

this will mean that those buying a car worth sh1 million will pay excise duty of sh200000 (20 per cent of value). anything below sh1 million will attract less than sh200000. a used vehicle worth sh700000 will, for instance, be charged a levy of sh140000 based on the calculation of 20 per cent of its value as opposed to the flat sh200000 that was in force from December 2015 to July 1  2016.

the new ad valorem rate of 20 per cent is therefore making used cars cheaper, and benefiting the vast majority of Kenyans as well as the banks who offer asset financ- ing. Most Kenyans buy second-hand vehi- cles that are worth less than sh1 million, with most units coming from Japan, south africa, united Kingdom and united arab Emirates.

It is estimated that used  cars  account for  between  80  and  90  per  cent  of  overall vehicle sales in Kenya,  according  to  the Kenya National Bureau of statistics (KNBs). New car sales take up the remain- der, with majority of the sales being driv- en by government and big companies, often multinationals, NsE listed firms and development agencies such as the united Nations, who can afford the very high and exaggerated new car prices in Kenya.

the overall demand for used motor vehicles has increased in recent years in light of an expanding middle class and a more vibrant sME sector and sME focused banking products. this development has augured well for the overall economy of Kenya. No longer is a vehicle a preserve of the moneyed few.

Whereas the cheapest new car in the Kenyan market retails at around sh2.5 million, used motor vehicles start from as low as sh700, 000, yet representing value for money. this wide price disparity also explains the greed of the formal motor industry, whose inefficiencies and lack of economies of scale, has continued to bleed the pockets of the Kenya business sector, especially sMEs, which are the drivers of wealth and employment creation.

Puzzling, is that most dealers of new motor vehicles in Kenya have opened par- allel second hand motor vehicle divisions, where they compete directly with the sMEs while taking advantage of government con- cessions.

For instance, toyotsu automart, a toyota Kenya group Company, special- izes in quality pre-owned motor vehicles, including service and spare parts sales, underscoring the growing number of cus- tomers   who   prefer   second    hand

Cost benefit analysis

the more pertinent issue is not importation, but rather which prod- uct—used or new—offers a better product-market fit as far as the Kenyan scenario is concerned. If  the product fits perfectly into the Kenyan market, the benefits it will present will outstrip the costs sub- stantially. this is already being seen by the visible positive impacts that used cars are having on various seg- ments of the economy.

 

SME sector

the sME segment is arguably one  of the largest beneficiaries of second hand car sales in Kenya. this is because of the major cost savings that used cars present for sMEs.

One of the major challenge fac- ing sMEs in Kenya today is high operational costs. Because of their sizes, sMEs don’t enjoy the econo- mies of scale that their larger coun- terparts often enjoy. similarly, they do not have the financial resources that big firms enjoy, compelling them to go for cheaper options when it comes to inputs.

according to a 2016 study com- missioned by Invest in africa (IIa) and strathmore Business school, inability to scale up is a major bar- rier that has seen 70 percent failure rate of Kenyan sMEs within the first three years of existence.

the inability to scale up usually comes from the unaffordability of assets essential to business expan- sion such as mode of transport- which boils down to prices of motor vehicles used as inputs for produc- tion, especially in the fast develop- ing services sector. super markets, deliveries, cleaning services, schools, hotels, supplies of commodities all need affordable mode of transport. When the motor vehicle prices are high, they are unaffordable to these

sMEs, especially startups.

secondly, the high cost of cap-  ital for acquiring assets financing, which stands at a minimum of 17.5% leaves used motor vehicles as the only economical  options  available for the sMEs and individual family  car buyers.

sMEs contribute about 45 per cent of Kenya’s gDP growth and employs over 85 per cent of the Kenyan work force. sMEs also con- tributes 90% of new employment created every year, in addition to providing soft landing to the thou- sands who lose their jobs from the formal sector due to mismanage- ment. sMEs in this context are the lifeline of majority of Kenyans.   and

motor vehicles play an important part in all the core activities of the sMEs. the biggest input in business is transport, hence cost of motor vehicles and fuels. and,  according to Vision 2030, sMEs will  be  a major driver of social development and youth employment, as well as a key lever in the enhancement of the country’s global competitiveness.

the overall positive impact that used motor vehicles  have  on  sMEs is therefore in line with country’s strategic interests.

this is good for the broader economy, considering sMEs are the engine of growth in the Kenyan economy.

Partnerships

used cars also present opportunities for partnerships. this has been seen in the banking sector, where asset financing has gained a lot of traction, effectively broad- ening banks’ product portfolio and in turn diversifying their revenue streams.

One of the incontestable maxims in the business world is that cash flow is king. However, nothing threatens cash flow more than huge capital expenditure such as expanding the company fleet. this is espe- cially true for sMEs, who do not have huge cash flows to begin with.

used car dealers in Kenya understand this, and have since partnered  with  banks to offer asset financing for sMEs. Majority  of banks today have an sME department, and this asset financing partnerships with dealers are good ad-on products that com- plement their sME product   suites.

asset financing for used cars has also been extended to salaried workers, opening up an opportunity for those in the middle class to own cars and move up the social ladder. In most cases, what a salaried worker needs to access the financing is 6 months bank statements, 3 months’ pay slips, PIN& ID and a net salary of only least sh50, 000. since the used cars are acquired through borrowed financing, they have to be secured against lose arising out of acci- dents, fire, riot or theft. Hence, high sales of used cars is a key driver to the insurance industry, vehicle accident and body respray workshops. and you cannot imagine the thousands of jobs so created, at all levels of the  human capital.

second hand car dealers therefore pres- ent   mutually   beneficial   opportunities for

sectors of the economy such as oil, tyre, spare parts, banking and insurance, bring- ing an  overall  positive  economic  impact  by creating evened growth across a wider range of sectors—that is, sMEs, banks and, of course, the motor service industry.

 

Job creation

It has been previously argued that used car dealers do not create adequate jobs, with proponents arguing that the only jobs cre- ated are the one-off jobs for the importer; the driver who brings the car from the Port to Nairobi or another inland town; and the yard salesperson. this is sadly too narrow  a view. It overlooks many other factors such as car repairs and maintenance, car wash, insurance salesmen, watchmen at various used car yards.

Like any other car, used cars also need maintenance. this is where the job cre- ation takes place. the number  of  garages in Nairobi’s industrial  area, for  instance, is awesome. a spot check along Nairobi’s streets and Roads, including residential areas will indicate that there are thousands of workers who depend on the used car sector for their daily bread. and parking? this is a new business stream for most building owners.

More importantly, continued job cre- ation by  the used car sector helps create  a reservoir of skills that could help Kenya attract foreign investment in fields that require specialized skills such as manu- facturing.

the projected uptick in used car sales therefore has a considerable ripple effect on diverse sectors of the economy—sMEs flourish; oil and insurance firms, banks and aftermarket parts supplies have oppor- tunities for more partnerships in asset financing; and, finally, more jobs will be created in the areas of the economy (Jua Kali) where they are most needed.

In conclusion, the country must think about the effect of its fiscal policies on the entire economy, and not just dance to the whims of a few industry players who have unfettered access to the government, yet whose business activities continue to serve as an albatross on the economic health of the nation.