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The metal industry
The main sub-sectors in Kenya's metal industry are steel smelting and hot rolling and the manufacture of wire and wire products, galvanized and cold-rolled steel products and pipes. These subsectors are interrelated, as they depend upon each other for the supply of inputs.
The Kenyan metals industry is relatively old, the first firm having been established in 1948. The industry is today dominated by a few Kenyan Asian-owned firms such as Kenya United Steel Company, Steel Africa, Mabati Rolling Mills, Insteel, Kaluworks, Galsheet and Doshi. The two leading Asian families in this industry are the Chandaria and Bhattessa groups, who also have extensive links in India and a number of other African countries.
The base metals industry started by manufacturing mainly nails, then gradually integrated backwards into wire drawing, followed by galvanizing, hot-rolling and remelting, cold-rolling, galvanized sheeting and pipe manufacture. The technology in the metals industry is largely embodied in the equipment and requires considerable skill for maintenance. There has been a conspicuous absence of indigenous Kenyans in the ownership, except for the minority shareholding they have acquired in a few firms recently. The firms rely partly on imported equipment and expatriate technicians but have built up considerable local know-how and skilled manpower.
History of firms covered in the sample
Origins, ownership and structure
The study covered three large-scale firms involved in the manufacture of wire and wire products, steel smelting and hot rolling: Kenya United Steel Ltd (KUSCO), Rolmil (Kenya) Ltd and the Associated Steel Company Limited. KUSCO, the pioneer in the industry, started the first wire products (nail) plant in 1949 and also the first steel rolling and smelting plant in Kenya in 1967.
KUSCO has the biggest mills, controlling about 40 per cent of the domestic market and accounting for about 30 per cent of Kenya's total exports of base metal products. KUSCO's nail plant faces intense rivalry from Nalin Nail Works, another wire products firm. During the 1970s these two firms integrated backward into wire drawing from imported rods. In 1983, Nalin Nail Works set up its Special Steel Mills for wire-rod drawing from billets. KUSCO's steel rolling and smelting plant was set up in an attempt to integrate backwards from nail manufacture, but the company has not been able to utilize this plant fully. Utilization rates in the two plants range between 50 and 60 per cent.
KUSCO has two electric arc furnaces for smelting, one of which has been completely idle since installation due to lack of local scrap and problems in importing scrap. The company has plans to venture into ship breaking to generate scrap locally. It has built expensive billet-making (continuous casting) facilities with the intention of acquiring wire-rod rolling facilities.
Rolmil is a relatively new operation owned by a Kenyan Asian group together with a foreign company (Cloris Co. Limited of Bermuda).
Established in 1966, Wire Products Limited produces mainly semi-processed products, drawn wire and various finished products such as nails, wire mesh, fencing wire, etc. It is one of the five companies owned by a holding company, Industrial Promotion Services (IPS) and the Aga Khan Fund for Economic Development (AKFED). IPS manages four other Kenyan manufacturing companies, i.e. Wakulima Tool Limited, Leather Industries of Kenya, the Plastic and Rubber Company Limited and a textile firm. IPS has a 45 per cent shareholding in Wire Products Limited, the oldest of the four companies. The Industrial Development Bank (IDB) had 30 per cent of the shares with the rest held by AKFED.
In spite of its recent establishment, Rolmil has made inroads in the export market. While only 12.4 per cent of its total production was exported in 1988, the proportion had risen to 17.1 per cent by 1990. It uses modern technology and does not operate with much excess capacity, unlike the bigger firms in the industry. Rolmil operates in a competitive environment with six other firms which have similar rolling facilities.
Rolmil has integrated its production backwards by developing its own arc furnace for smelting, largely to reduce dependence on other local firms for supplies of inputs. Although the investment in the new arc furnace is likely to create excess capacity, Rolmil justifies it by arguing that dependence on domestic competitors for the supply of its inputs resulted in high costs of production. The firm has captured a significant market in neighbouring countries where it has retained customers by offering them competitive prices and by ensuring that orders are filled on time.
Wire Products Limited exports about 15 per cent of its products directly, while another 25 per cent is exported indirectly by Kenyan middlemen to neighbouring countries. The firm has developed markets in Uganda, Sudan and Somalia where it sold semi-processed wire. It also sells finished products such as nails, welded mesh, fencing wire and reinforcement fabrics to Rwanda and Burundi. Political instability in Uganda, Somalia and Sudan has adversely affected the firm's exports to these countries. The demand for Rolmil's products is, however, generally high and it is at times unable to satisfy the domestic and export demand adequately. While the larger part of the company's products were sold domestically, it has developed a stable export market in the region. The firm's export drive was partly due to export compensation and other export incentives provided by the government. The firm has plans to expand its operations and export to the larger regional markets, especially following more recent export incentives, which now allow exporters to retain 50 per cent of their foreign exchange earnings.
Kenya's metal and engineering industry was initially reliant on the domestic market, where building and construction was rapidly expanding. But the region's relatively under-developed metal industry provided substantial export opportunities for Kenyan metalworking enterprises.
Technology, productivity and human resources
Characteristics of demand in target markets
The success of Rolmil's exports is largely due to the nature of the export market (Uganda, Tanzania and Rwanda). Importers from these countries have not been very discriminating in terms of quality. This has permitted the use of less expensive local steel technologists and engineers, allowing the Kenyan firms to modify their production processes to raise capacity and reduce processing costs. But these were only short-term solutions and some of the firms are realizing that, in the long run, quality will be a decisive factor
if their export shares are to be maintained or increased. These firms are already facing a growing challenge from Zimbabwean firms, which are more competitive due to the domestic availability of raw materials.
The Kenyan firms had a comparative transportation advantage in the Eastern Africa region, particularly to Uganda, Rwanda and Burundi. The transportation costs of these landlocked countries inhibited the importation of bulky products from other more distant countries. Their domestic markets are also too small to justify the establishment of steel rolling or wire products mills. These factors have enabled Kenyan firms to retain considerable power in the markets of these countries.
Human resources and skill development
In the last three decades, Kenya has established a large number of technical schools, polytechnic institutions and village polytechnics. These institutions have become a base for supplying the skilled labour required in the metal industry. All three metal industry firms studied had benefited from these institutions.
With an annual turnover of about KSh80 million in 1990, Rolmil had a labour force of about 215 employees. The number of permanent employees has remained more or less the same over the last 10 years. Machine operators are employed with just the basic knowledge acquired in schools and colleges. The firm has a well-established training programme for production staff. Employees are released annually for training in polytechnics and other training institutions. The impact of the training is evaluated by monitoring staff performance. The company also has an active on-the job training programme and participates in specialized seminars, especially for management staff.
The firm accorded training opportunities to virtually all its senior staff, which had raised the morale of the staff. Factory staff were awarded monthly production bonuses for departments which achieved set targets. Over the past five years, only 12 people had been dismissed and only five had resigned - showing high stability in the workforce. The company's salary level was generally above average for Kenyan industrial employees. The company had generally fair working conditions, which government factory inspectors found satisfactory. Noise and pollution were, however, serious problems, because workers did not seem to use the devices provided to protect themselves.
To cope with unpredictable fluctuations in production, Wire Products Limited has maintained a regular workforce of permanent employees and a relatively large number of casuals, from 50 to 70 at any one time. The biggest handicap of such a high proportion of casuals was inadequate training.
Technology and productivity
The production capacity of Wire Products Limited is 900 metric tonnes of steel products per month. But the actual production is about 500 tonnes per month, a 55 per cent utilization rate. Optimal capacity utilization has been hampered by raw material shortages, due to delays in processing import licences, and breakdowns of production equipment.
Until 1977, when it installed a multi-block wire-drawing machine, the company did not have any wire drawing capacity. It now has three wire-drawing machines. Before 1977, the main input was drawn wire, imported from France, the UK and Germany. Since 1977, the company's main input has been wire rods, imported for the manufacture of construction bars and reinforcement fabrics. For the last 12 years, Zimbabwe has been virtually the only source of wire rods. South Africa, a new entrant, has become an important source because of its more competitive prices and quick delivery of imported materials.
Wire Products uses the cold drawing process, a conventional technology which is being phased out in developed countries. The company obtained second-hand machines at cheap prices. The competitiveness of the firm's products in the export market was based on the inability of neighbouring countries to establish a wire-drawing plant because of the large amount of capital required and their small domestic markets and lack of skilled human resources. This made it difficult for these countries to justify installation of a wire-drawing machine. The firm is, however, aware that this is only a temporary situation and is trying to raise its efficiency and quality in order to retain its share of the regional market. It is also intensifying its marketing efforts in the region and has recently strengthened and reorganized its marketing department for this purpose.
Wire Products mainly exports semi-processed products as dictated by the importing countries' IS policies. Some of the neighbouring countries have already acquired the capacity to produce finished wire products, as the machines used to manufacture end products are generally smaller and cheaper and, therefore, are affordable in some of these countries.
The company also attributed its competitiveness in the export market to the quality of its products. Since inception, the company has maintained a fairly strong quality control department which uses both domestic and international standards. For products destined for the domestic market, the quality control department relied on benchmarks set by the Kenya Bureau of Standards (KBS), while for export consignments customers usually gave their own specifications. The specifications, did not, however, include the chemical composition of the materials, since it had already been determined by the manufacturer of the raw material. The cold drawing process does not change the chemical structure of the material. For products used in big projects employing international specifications, the company relied on higher-quality billets. This market differentiation enabled it to reduce manufacturing costs.
One of the limitations for the company's exports has been a rather conservative marketing strategy pursued in the past. The firm avoided working through established agents or distributors outside the country. It also did not use consulting firms. It relied largely on marketing personnel from the parent holding company, IPS. Due to its dependence on IPS, the company had not fully established a department to market products in the region, but with the present greater focus on export markets it is in the process of creating such a department.
Because of its broad connections in East Africa, IPS handled the publicity for products from its associated companies but the costs were met by the companies themselves. The management staff was also provided by IPS. Due to the considerable level of IPS specialization in marketing in the region, its companies benefited from lower advertising costs and greater knowledge and familiarity with the regional markets.
The cement industry
The cement industry in Kenya consists of two firms: the Bamburi Portland Cement Company (BPCC) and East African Portland Cement Company (EAPC). BPCC, the larger and older of the two, was established in 1954 to produce for local and export markets. EAPC was established four years later in 1958 and produces primarily for the domestic market. Of the two, BPCC has a competitive edge due to its more efficient technological process and more
experienced management. It uses a dry process and operates the cheaper coal kilns. EAPC on the other hand had not shifted away from the traditional wet process technology, which is older, inefficient and uses expensive kilns.
History of firms in the sample
Origins, ownership and structure
BPCC and its subsidiaries are incorporated in Kenya. The cement plant is strategically located about 15 km north of the Mombasa harbour, the main exporting outlet. The principal activity of the parent company is the manufacture of clinker and cement derived from coral rock. One of its subsidiaries is engaged in agriculture and the environmental restoration of areas from which coral rock has been excavated. This includes land rehabilitation fish farming and landscape consultancy. Another subsidiary, though not operational, owned valuable coral land which serves as a reserve of raw materials. This land is expected to provide the major source of limestone for BPCC in the next 20 years.
BPCC started as a joint venture between the Kenyan government and Bamsem Ltd. By 1988, Bamsem held 74 per cent of the shares and the Kenyan government held 16 per cent. The remaining 10 per cent was held by the public through the Nairobi Stock Exchange. In 1990 the foreign investors increased their shareholding. In 1992, the Kenyan government indicated its intention to sell its shareholding in BPCC as part of the privatization programme being undertaken under the structural adjustment programme (SAP). The firm has been operating under a management contract with Cementia A.G. from Switzerland.
EAPC started operations in 1958 and was incorporated in 1963. It has a majority government shareholding (50 per cent). Another 28 per cent was shared between investors in the UK and Switzerland, while local private investors held 22 per cent. The management of the enterprise is, however, wholly local. The plant is located about 30 km east of Nairobi, at Athi River, where it extracts its main raw material. In 1992, EAPC was also listed among the companies to he privatized.
The cement industry in Kenya is an example of an industry which has substantially lost its export share due to its inability to keep up with technological advances in a highly competitive international market. Cement exports declined in the mid-1980s (see Table 10.6) due to the near collapse of the international cement market. Prices fell below levels that could sustain BPCC's cost structure. In 1985, BPCC's export price was $34 per tonne, which was quite close to the economic price of about $36 per tonne, landed at Mombasa.
Table 10.6 Production and exports of cement for BPCC
|Domestic sales (tonnes)||148 750||111 530||348 330||573 670||648 500|
|Exports (tonnes)||401 350||638410||440000||316330||451300|
|Total production (tonnes)||550 100||749 940||788 330||890 000||1 099 800|
|Exports as % of total||73.0||85.1||55.8||35.5||41.0|
Table 10.7 Basic data for the two cement-industry firms 1990
|Installed capacity (tonnes per year)||1 050 000||360 000|
|v. production||827 500||413 000|
|Specific energy consumption:|
|(Kcal/kg) clinker||1 130||1 170|
|(On fuel basis) cement||1 482||1 408|
|Fuel used||Coal 65 %|
|Fuel oil 35 %||Fuel oil 100%|
|Cost per unit of output||$48.66||$68.72|
|Raw material costs||Relatively low||Relatively low|
|Energy costs per tonne of product||$16.48||$23.78|
|Overall efficiency (operation and maintenance)||Average (needs further improvement)||Poor (needs improvements)|
|Training programme||Under way||Under way|
|Development programme||Energy efficiency programme started||Conversion to dry process and to coal use under way|
The main inputs used by BPCC are oil, coal, hydro-electric power, fluorspar, iron ore, gypsum and pozzuolana. Production costs increased in the 1980s by an average of 20 per cent per annum, partly due to the persistent depreciation of the Kenyan Shilling. The firm had loans denominated in foreign currencies. This could have been counterbalanced by export sales, but the foreign exchange policies pursued by the government did not facilitate this. The recently introduced retention accounts scheme for exporters is expected to change the firm's position radically for the better. Bamsem's increased shareholding in BPCC brought benefits to the local firm as more capital was injected into the company. Bamsem also drew up an extensive training programme for professionals in the firm. Bamsem initiated further technology improvements using its wide experience in the cement industry in Europe. These positive developments were yielding results by 1991/92. The declining trend in exports was reversed as BPCC once more became competitive in the market.
Between 1980 and 1987 export sales were adversely affected by BPCC's inability to compete internationally, especially when the international prices of cement collapsed. This considerably reduced export volume during the period. BPCC was forced to continue exporting at a loss in order to maintain some of its market share while it awaited improvements in international prices and its own technology. In 1991/92, international prices picked up, domestic prices were decontrolled and technology was upgraded. This boosted exports and improved the firm's profitability.
Technology, productivity and human resources
Technology and productivity
EAPC used a relatively inefficient wet process and relied on the more expensive fuel oil kilns. The company's expansion and conversion to a more efficient process has been constrained by lack of raw materials (limestone and clinker). The firm also suffered from bureaucratic delays in decision-making from the government, its principal shareholder.
Cementia A.G. (Switzerland), which runs BPCC under a management contract, had, on the other hand, quickly taken a number of decisions to ensure that BPCC remain competitive in the export market (Table 10.7). The first was the conversion from fuel oil to coal firing in the early 1980s, the second was the implementation of an energy efficiency programme in 1985. Thirdly, and more significantly, the technological process was improved using an IFC loan and later a Japanese government credit. Lastly, after a protracted tussle with the government over restrictive price controls on cement, BPCC finally benefited from price deregulation in 1992. This enabled it to adjust domestic prices to economic levels to compensate for higher production costs and the depreciating Shilling. These factors played a significant role in BPCC's increasing its export levels from 316 330 tonnes in 1990 to 451 300 tonnes in 1991.
Impact of government policies
The poor performance of BPCC illustrates how inappropriate government policies can run down an otherwise profitable private company to near collapse. Two policies in particular were responsible: the rigid price control on cement sold locally and the failure of the government to remove or at least reduce import duties on coal following the firm's decision to shift to coal firing. Prior to that, BPCC had been using fuel oil, which was costing large amounts of scarce foreign exchange. Coal was cheaper on the world market. For over eight years the government failed to adjust prices to levels that would turn around the firm's performance. As a result, it became difficult for BPCC to secure financial assistance to refurbish the plant. It was alleged that the firm's inability to win the government's favours was because the management was aligned to the wrong political faction. Continuing under-capitalization of the firm placed it in an increasingly poor position. This threatened to wipe out its exports and even made the country a net importer of cement in the late 1 980s.
Pulp, paper and packaging
Pulp and paper production in Kenya is presently dominated by one firm, Pan African Paper Mills (Panpaper). There are, however, several smaller mills engaged in the production of various kinds of paper and packaging materials. Panpaper accounts for 40 per cent of employment and over 60 per cent of value added in this industry. There are over 20 medium and large enterprises for which Panpaper is the main supplier of raw materials. The industry has linkages with Eastern and Southern African countries, where it provides other industries with packing, printing, wrapping materials and newsprint. The industry is dominated by Indian groups, who have extensive operations in the country and other countries in the region.
History of firms in the sample
Origins, ownership and structure
The firms in the study sample are Panpaper and East African Packaging Industries (EAPI). Panpaper started operation in 1974 as a joint venture between the Kenyan government, the IFC and Orient Paper Mills, part of the Birhla group from India. Its primary objectives were to enable Kenya to reduce paper imports and to earn foreign exchange through exports.
The first plant of EAPI was established in Mombasa in August 1959 with 75 per cent of its shares foreign owned. The second plant was established in Nairobi, in 1963. Each of the plants had increased its workforce to about 300 permanent employees by 1992. EAPI specializes in the production of packaging materials. Among its main products, and main export items, are paper sacks, including those used in packing cement, tea and sugar.
EAPI was one of the pioneers in the region in the manufacture of paper sacks for tea, replacing the wooden chests which had traditionally been used. Following the approval of paper sacks by the World Tea Association, the technology quickly spread. EAPI started manufacturing paper tea sacks in 1980. In 1993 it was the only firm producing this item in the country. Some of the other producers of paper tea sacks are in Sri Lanka, Australia, Zimbabwe and South Africa. Since the quality of paper sacks is generally standardized, a firm's competitiveness in the export market is significantly determined by its ability to keep labour and other costs down.
As already mentioned, the primary objective of Panpaper was to produce paper domestically to substitute for paper imports and to expand exports. This dual role of saving and earning foreign exchange had only partially been realized. In its early years of operation, Panpaper exported substantial proportions of its output, reaching a peak of 29 per cent in 1978. However, as domestic demand grew, the firm reduced its export share in order to satisfy local requirements. By 1985-86, exports were down to 0.2 per cent of output. However, with expansion in 1990- 92, this trend has been reversed and the firm was able to increase its export share to 10 per cent in 1992.
EAPI has been more successful in fulfilling its export objectives. In the 1970s and most of the 1980s, the company exported about 20 per cent of its total output. This proportion declined marginally in the late 1980s because some of the countries which used to import the Kenyan product established their own paper sack plants. In addition, EAPI had experienced some problems in obtaining raw materials. Burundi has been the firm's largest market for tea sacks, followed by Uganda and Tanzania. Its main export markets for cement bags have been Sri Lanka, Brazil, Tanzania, Sudan and Mauritius.
EAPI's success as an exporter was the result of a combination of factors. It was among the first firms to manufacture paper tea sacks. This gave the firm more or less monopolistic power in the region for some time until other countries established their own plants. Moreover, throughout most of it history, the firm has been able to offer competitive prices because of the export compensation scheme. The relatively low labour cost in Kenya was an added advantage. Kenya's labour costs were, for instance, estimated by EAPI's management to be about 20 per cent of those in South Africa. Availability of some of the raw materials locally, especially paper from Panpaper, was another advantage. The firm is among the largest domestic buyers of paper from Panpaper, consuming 900 tonnes of raw materials per month.
The firm has also given sustained attention to export markets. Both the Nairobi and Mombasa branches of EAPI have export departments charged with the responsibility of promoting exports in the region and beyond. Finally, the large domestic demand for paper sacks for tea and cement enabled EAPI to enjoy economies of scale and to supply its products at competitive prices to the export market. The tea industry in East Africa obtained most of its packaging requirements from EAPI. The BPCC and EAPC cement firms continue to be the most important domestic consumers of cement sacks from the firm, which has established a plant in Mombasa to specialize in the production of cement sacks. The rapidly growing horticultural export business has had a significant positive effect on the expansion of domestic demand for paper packaging material.
External factors affecting export growth
Raw material problems
Panpaper uses plantation forests for which it pays royalties to the government, which has a virtual monopoly on the supply of logs since it owns most of the country's forests. The rapid depletion of forests due to increased land use and other competing timber uses has forced Panpaper to launch its own afforestation programmes. The government has also substantially raised royalties, reducing Panpaper's ability to compete against legal imports, which were subject to a 25 per cent tariff. Panpaper has in the last three years established new plants utilizing alternative raw materials such as scrap paper. Duties on imported inputs such as chemicals, higher-priced local logs and depressed paper prices on the world market were external problems identified by the firm's management. The firm had also experienced higher power costs.
Constraints on EAPI's exporting capacity included raw material supply limits from Panpaper and the loss of export markets as some importing countries established their own plants. This was a particular problem for EAPI because the manufacture of paper sacks is essentially a low-technology and low-capital industry. EAPI was also hampered by inefficiency and corruption at the Mombasa Port and under-utilized capacity - 50 per cent in the Mombasa plant and 65 per cent at the Nairobi plant. The seasonal nature of horticultural exports aggravated the under-utilization of capacity during horticultures low seasons. Shipping costs were also high, reducing the competitiveness of the firm's products in Europe and other distant markets.
The recent relaxation of trade links with South Africa eased the problem of raw material supplies to some extent, as the firm was able to receive paper raw materials within 10 days, as compared with 4-5 weeks for materials from Europe. In the last two years the firm has obtained about 40 per cent of its raw materials from South Africa.
Technology, productivity and human resources
Characteristics of demand in target markets
Panpaper produces a wide range of products, including bleached and unbleached papers for packing, printing, wrapping and newsprint' in about 35 grades. This diversity means that it cannot achieve economies of scale. The scale is determined by product diversity and to a considerable extent by the country's varied industrial/consumer needs. Panpaper could not avoid this given the existing structure of the industry. Costs could be reduced if the firm specialized in a smaller range of papers or was able to export more of its output.
Technology and productivity
Over time, Panpaper has established an impressive and well-run operation. Not only has the foreign partner, Orient, effectively transferred some know-how regarding plant maintenance and operation, it has also improved the plant's operating levels. Energy consumption in terms of fuel per ton of paper has been reduced by 25 per cent through equipment modification, better 'housekeeping', and raw material switching. Its technicians have found ways of using new raw materials such as eucalyptus, straw and scrap paper. The company has also modified its processes to use local corn-starch instead of imported TKP (tamarind kernel powder). Its chemical recovery rate of 92 per cent was comparable to that of efficient plants elsewhere. The firm operated a captive caustic soda, chlorine and hydrochloric acid plant, the largest of its kind in East Africa. Its operations, being semi-automated and spread over a broad product range, required more skills than a plant of a similar size in an industrialized country. Its workforce has gradually mastered a significant number of those skills, while its workshop can manufacture various simple spare parts.
EAPI has settled for an intermediate technology and relied on second-hand machines. The firm buys reconditioned machinery which has been discarded by European firms in favour of automated machines. New technology in the manufacture of paper sacks is mainly focused on increased automation and mass production, which are not so crucial for developing countries with small domestic markets. The management of the enterprise argued that reconditioned machines were for the time being adequate and suitable for the Kenyan market.
Human resources and development of skills
Panpaper employs about 2 200 local staff and 235 expatriates. Its rural setting (Webuye), far from major cities, compelled the firm to develop an intensive training programme a year before actual production started, as local skills in paper manufacturing were virtually non-existent. The complexity of the process called for a large number of expatriates. Of the 235 Indian technicians appointed at the start, 30 remained in the firm by the end of 1992. The firm's training school had turned out nearly 3 000 graduates from a variety of technical courses. Several technicians have been sent to India, Europe and North America for advanced training. This intensive effort has yielded results, so that Panpaper has been able to reduce the number of expatriates significantly and keep the plant running at high capacities in addition to expanding capacity and introducing new products. The productivity of workers has increased over time, though it was still below levels in countries such as India.
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