Automotive assembly lines stand ready for a rise in local production

Passenger vehicle density in Kenya is limited, with just 14 vehicles per 1000 people, according to the World Bank. This compares with 54 in China and 112 in South Africa. Yet the automotive market is anticipating strong future demand based on high urbanisation rates and a rise in purchasing power, and has attracted substantial investment in recent years. Identified as one of 20 segments that can invigorate the national industrialisation process, the government has announced measures to support and develop the automotive industry.

Renewed Interest

Traditionally, Kenya’s automotive market was focused on retail and distribution, a consequence of government policies that encouraged the importation of used vehicles. An estimated 70-90% of Kenya’s current fleet are second-hand imports, principally coming from Japan, the UAE and Europe. However, the number of newly registered vehicles grew by 27% from 2009 to 206,000 in 2011, bringing about renewed interest in local production.

Kenya already has a strong foothold on the production side, with several domestic vehicle assembly plants. Among the largest are those of US-owned General Motors East Africa (GMEA), Kenya Vehicle Manufacturers (KVM), Associated Vehicle Assemblers and India’s Hero MotoCorp. These plants concentrate on the assembly of pick-ups, heavy commercial vehicles and motorbikes from completely knocked down kits (CKD) that avoid a 25% duty on imported vehicles. The government owns shares in both GMEA and KVM.

China’s Foton established a $50m assembly plant in Nairobi in 2011. Japan’s Hino followed, in partnership with Toyota Tsusho, building a plant in Mombasa, and in 2013 Honda established a $5m motorcycle plant in Nairobi with an annual capacity of 250,000 units.

Government Support

The government has sought to provide a raft of incentives to boost production and consumption of locally assembled vehicles. One of the grander ambitions was the 2008 proposal for a 40-ha automotive industrial park in Voi, 100 km from Mombasa, though this has yet to materialise. Other proposed measures include incentives for buyers to replace second-hand cars with locally assembled vehicles, the reduction of tariffs on imported parts and the launch of joint ventures with established manufacturers.

However, plant operators are still operating below capacity. Despite estimated demand growth of 10% per year across the region, employment across the sector rose by just 4.4% between 2006 and 2010.

CKDs

Duty-free export of CKD motor vehicles across the East African Community (EAC) was scheduled for 2005, but costs and levies still apply. Exports are also frustrated by varying interpretations of key ordinances in the East Africa Rules of Origin.

Duty exemption for CKDs is permitted if cost, insurance and freight is below 60%, the ex-factory value-added costs are 35% or the final product qualifies under a new tariff as representing a substantial transformation of the original product. Manufacturers targeting foreign markets have sought to export under the third definition, but uncertainty over EAC definitions of both CKD and assembly – qualifying terms for duty exemption – continues to limit shipments.

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The Report: Kenya 2014

Industry & Retail chapter from The Report: Kenya 2014

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