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1 For further details see, for example, The Sovereignty Budget. Federal Ministry of Information, April 1961.
2 See, for example, Oluremi Ogun, Nigeria's Trade Policy During and After the Oil Boom: An Appraisal, University of Ibadan, 1987.
3 For a succinct review of Nigeria's exchange rate practices since independence, see T. Ademola Oyejide and Oluremi Ogun, Structural Adjustment and Exchange Rate Policy', in A. Iwayemi (ed.) Macroeconomic Policy Issues in an Open Developing Economy: A Case Study of Nigeria (a Ford Foundation Sponsored Book Project, forthcoming).
4 A detailed analysis of industrial incentives in the 1970s can be found in J.W. Robertson, The Structure of Industrial Incentives in Nigeria, 1979-80, Research Report of the World Bank, Washington, D.C., 1981.
5 The information in this section is drawn from the UNIDO Industrial Development Review series, 1985 and 1988 editions; the CBN, annual reports and statement of accounts (various issues); the Federal Republic of Nigeria, First National Rolling Plan,1990-92 (Government Printer, Lagos); and MAN, Half Yearly Economic Review, January-June 1988.
6 For references, see The Brewery Industries: A Major Contributor to Nigeria's Development (The Beer Sectoral Group of MAN); UNIDO Series (ibid.); CBN (ibid.).
7 New states have been carved out of these states since 1991. None the less, their policy of no involvement in the production of beer or any alcoholic drink, based on religious belief, applies equally in the newly created states.
8 For further information see UNIDO series (ibid.) and CBN (ibid.).
9 See ELAN, Lease Awareness Seminar January, 1993; Corporate, Corporate Journal on Leasing; 'The New Order' in Corporate Magazine, November/December 1991; ELAN, Annual Report and Accounts 1991.
Introduction
The textile and clothing industry
Food
processing
The
pharmaceutical industry
The
metal industry
The
cement industry
Pulp,
paper and packaging
Leather
and footwear industry
Summary
Notes
Bibliography
Gerrishon K Ikiara
Context of the study
This study explores the principal factors underlying the growth and performance of Kenya's manufactured exports. Although Kenya's manufacturing sector has expanded and diversified its production, only a few firms can boast of an impressive export record in the last 25 years. Inability to develop a highly competitive export market continues to pose a formidable challenge to the country's industrial sector, although, since the mid-1970s, the government has introduced a number of export incentives including lower taxation and export compensation Most firms were originally set up to operate in highly protected domestic and East African regional markets, under an import substitution industrialization (ISI) regime. This made them inward-looking and less interested in export markets.
The sample firms in this study are drawn from the textiles and clothing, food processing, pharmaceutical, metal, cement, paper and packaging, and leather and footwear sub-sectors The aim was to assess the extent to which technology, government policy, marketing strategies, management, labour productivity, ownership structure and size of firms, and the structure of the domestic market influence the export performance of manufacturing enterprises.
Many of the firms established in Kenya in the colonial era were subsidiaries of foreign companies which saw potential market opportunities in the East African region. The region also had some of the necessary raw materials and cheap labour. Kenya's competitiveness in the regional trade in manufactured goods has been the result of a number of factors. The country had, for instance, a comparative advantage in transportation in the region, a favourable cool climate and a greater number of foreign settlers and businessmen. It started the industrialization process ahead of many others in the region. British multinational firms dominated the scene during the colonial period but were later joined by other European and American companies. Local industrialists joined the manufacturing scene relatively late.
The Kenyan manufacturing sector
Kenya's manufacturing sector presently contributes about 13 per cent of GDP (Republic of Kenya, 1992).1 By 1992, manufactured products accounted for 13 per cent of the country's total exports,2 having fallen from about 16 per cent in 1975. Total industrial output expanded by an annual average of 5 per cent between 1970 and 1990. Most manufactured goods, however, remained uncompetitive outside the Eastern Africa region.
Kenya's manufacturing sector has been rather slow in technological change' unable to attain economies of scale and considerably constrained by foreign exchange shortages. It is' however, quite diversified and includes subsidiaries of such multinational companies as Unilever, Boots' British Oxygen, Brooke Bond and Imperial Chemicals (UK); Pencole, Hoescht, Siemens and BASF (Germany); Bata (Canada); Nestlé and Cementia (Switzerland); Colgate Palmolive and CPC (US); CMB Packaging (France) and the Orient Birhla Group (India). Industrial products manufactured in Kenya include textiles, leather and footwear, plastics, pharmaceuticals' steel products' rubber, electric cables' paper' industrial gases' rubber' ceramics and batteries.
Review of government export policy
Kenya had a regional advantage in the industrialization process in the colonial period due to British industrialists' preference for Kenya when establishing branches in the region. A strong entrepreneurial community, mainly European and Asian' had developed by the end of the 1950s. A good industrial, financial and communication infrastructure was also in place, which became another attraction to foreign investors.
At independence in 1963, the government made deliberate attempts to expand import substitution industries. Ten years (1967-77) in the East African Community (EAC) provided a large market and justification for expanding production capacity. In addition' the government established institutions to provide credit and technical training and allowed partnership with foreign investors. However, the collapse of the EAC market in 1977, and the economic crises in the 1970s and 1980s, left many Kenyan industries with excess capacity.
By the mid-1970s it had become evident that Kenya's manufactured exports to the region were declining and that an ISI regime was no longer adequate, with consumer goods now accounting for only 12 per cent of total imports. In 1974 the government started promoting export-oriented industries. It established an export promotion council and a 10 per cent export compensation scheme for manufactured exports. The rate of compensation was progressively increased in subsequent years until the scheme was abolished in 1993. In 1976 the government set up the Kenyan External Trade Authority (KETA) to strengthen and reorganize export promotion.
In the 1980s the government embarked on a policy of import and price liberalization and a flexible exchange rate system. It established an Investment Promotion Centre to reduce bureaucratic red tape in the processing of new investors' applications. The government also introduced a Manufacturing Under Bond Scheme and established a 'green channel' for exporters to remove unnecessary administrative procedures in exporting final goods and importing raw materials. It begun rationalizing the tariff structures as well, which entailed reducing the number of duty rates and harmonizing classification of items to conform to international standards.
In the 1990s, the government continued to accord exporters high priority and more incentives. In 1993, a 50 per cent foreign exchange retention scheme for exporters was introduced. Corporate tax has also been gradually reduced from 45 per cent in the 1980 to 37.5 per cent in 1992. An Export Processing Zones (EPZ) Authority to promote the development of export processing zones has also been established. In 1990, a privately owned EPZ became operational in Nairobi and the government embarked on development of two more EPZs, one on the Athi River near Nairobi and another in Mombasa. The foreign exchange system was liberalized by allowing an inter-bank foreign exchange market, which enabled importers to purchase foreign exchange from commercial banks at commercial rates.
Kenya is one of the twenty member countries of the Preferential Trade Area (PTA) of Eastern and Southern Africa, which has been trying to promote trade among the member countries at lower tariffs and in local currencies. The PTA Authority has also adopted a planned approach to the development of core industries such as steel, textiles, pharmaceuticals and cement. These are, however, yet to be seriously implemented.
The textile and clothing industry
Background
Textiles and clothing account for 12 per cent of total manufacturing value added in Kenya (Coughlin, 1986). The textile and clothing industry expanded steadily between 1960 and 1980 due to increased private sector and government investment and the industry's relative competitiveness in the region. However, it has stagnated in the last decade as a result of inadequate supplies of raw materials, increased imports of second-hand clothing, inadequate modernization of equipment and machinery in government-owned enterprises and a failure to increase exports, especially following the collapse of the East African common market. This inevitably led to low capacity utilization and rising costs.
The textile industry was among the earliest modern manufacturing activities in the country, with the first plant established in the early 1930s by Indian investors. Sunflag was the first integrated textile plant, in 1936, and was later followed by other Indian-owned firms. In the 1960s the government, through joint foreign ventures, further expanded the industry. By 1992 there were 47 medium- and large-scale textile firms in Kenya. There are 15 integrated (spinning, weaving and finishing) textile mills, accounting for 85 per cent of the total installed capacity of 130 million metres of fabric per annum. The industry is expected to expand further with the planned establishment of more mills in the new Export Processing Zones in Nairobi and Mombasa.
The Kenyan textile industry relied heavily on cotton yarn until the 1960s. Thereafter the industry begun shifting away from cotton to synthetic materials following a general world-wide trend. The unreliability and high cost of locally produced low-quality, medium-staple cotton and high duties on imported cotton contributed to this shift. An inefficient processing and marketing structure, partly attributable to the monopoly power of the government-controlled Cotton Lint and Seed Marketing Board, raised cotton prices 60 per cent above world market prices. The quality of this cotton remained poor, partly due to dirty lint and while ginning suffered from poor quality control. The government continued to protect local producers by maintaining high protective tariffs on imported cotton, which further contributed to inefficiency and lack of focus on export markets.
By 1992, synthetic materials accounted for 55 per cent of the total textiles produced in Kenya. This led to the establishment of some nylon and polyester extrusion plants based on imported materials. Wool degreasing and processing facilities were also expanded. Dyes and chemicals are mainly imported, so that the industry had weak linkages with the rest of the economy.
The industry is constrained by the low domestic production of required inputs such as cotton and wool. Foreign exchange constraints have also limited importation of synthetic fibres and other raw materials. As a result, capacity utilization was below 60 per cent in many firms.
It is, however, evident that a number of firms in the textile industry have improved their efficiency, technical competence and managerial capabilities since the 1970s. The private firms appear to be generally better managed than the parastatals. Foreign shareholding and expatriate management teams were instrumental in strengthening technical and marketing management in the industry, especially in 1960s and 1970s. Some of the Kenyan textile firms are owned by business groups which have other international textile operations. Sunflag (Nairobi), for instance, has textile mills in Tanzania, Nigeria and the UK, while Raymond is part of a large international Indian group. Apart from their long experience, these groups brought with them expatriate technical personnel. Such international connections seem to have given some of the firms the advantage of easier access to foreign markets and new technologies.
Kenyan textile firms, especially those owned by the government, suffer from lack of specialization. The minimum economic size of a spinning plant is in the range of 25 000-30 000 spindles but Kenya's average size is about 8 000 spindles per mill. Most mills in Kenya produce small quantities of a large variety of products and so lose any specialization advantage. This has to some extent been dictated by domestic market requirements. Most firms manufacture particular fabrics on order and are therefore forced to accept both large and small orders in order to maintain ties with their traditional customers.
To increase exports, the textile industry requires greater awareness of foreign markets and technological developments as well as intense market research, quick responses to changing conditions, promotion of quality and strict quality control. Most of these conditions have not been aggressively pursued in Kenya.
The sector appears to be split into two groups. One is export-oriented and has adopted new equipment and modern technology to produce relatively high-quality textiles. The other, comprising mainly government-owned firms, uses conventional technology and produces textiles largely for the domestic market.
Histories of the firms in the sample
Origins, ownership and structure
The textile firms covered in this study are Raymond Woollen Mills Ltd. Rift Valley Textile Mills (Rivatex) and Sunflag. The first and third are privately owned while the second is a parastatal enterprise.
Raymond Woollen Mills is located in Eldoret, 300 km from Nairobi. Its head office and sales offices are, however, in Nairobi. The factory was located in Eldoret to take advantage of various tax incentives which were especially important in the 1970s. The firm is a subsidiary of a large textile firm in India. Although its capacity is relatively small, its specialization in high-value synthetic and woollen suiting fabrics, knitwear and garments has given it a high profile in the country, especially because of the high quality of its products. It has the most modern textile plant in the country, equipped with Sulzer spinning machines, 48 shuttleless projectile looms, knitting and finishing machines. As a subsidiary of a competitive Indian multinational textile company, it has better access to superior technology and management. Technology transfer has been mainly through acquisition of new machines and training the workforce.
Rivatex was established in 1976 and is among the few relatively successful parastatal textile firms in the country. The government's 80 per cent shareholding is through the Industrial and Commercial Development Corporation (ICDC). Other shareholders are FIDA (Swiss), IFC (World Bank) and DEG (Germany). Between 1976 and 1980 Rivatex was managed by Siditex, a private managing agent, after which it was turned over to the government. After 1985 Rivatex started to lose its competitiveness due to poor management and failure to revamp its ageing mills.
The firm was established at a time when the country was vigorously pursuing ISI as a key strategy in the development process.
During that time, domestic production of textile products was below demand. The Nytil Mills of Uganda alone was exporting 15 million metres of textile fabrics to Kenya annually. Rivatex increased its production to capture a larger share of the domestic market.
Cloth for kangas is the main product, the 480 000 metres produced monthly in 1990 and 1991 being about 50 per cent of Rivatex's total production. Kanga light suiting and school checks are exported. Other products include kitenge (an African fashion), camouflage for the armed forces, poplin, khaki, drill flannel for children, furnishings and fabrics for skirts.
Sunflag, Kenya's first integrated textile mill, was established in Nairobi in 1936 by an Asian group that had connections with the textile industry in India. It started with one establishment engaged in weaving and garment making. By 1963, Sunflag had three other integrated mills in three establishments employing over seven hundred workers. The local Asian group relied heavily on their Indian connection to modernize their mills and improve their know-how.
Initially Sunflag started with the production of cotton textiles for the local market. In 1960, Sunflag established a large garment plant in Nairobi which produces mainly knitted fabrics, shirts, underwear and blouses. Senior management positions are held by family members, who appeared to have provided the impetus for growth, modernization and the expansion of the mills.
Technology and export history
The Kenyan textile industry has a relatively short export history (World Bank, 1986). Exports are mainly to the neighbouring countries, except for Raymond, which has been able to export some of its products to the European market. Raymond, the most successful exporting firm in the country, gained access to this competitive market through its superior technology. Its Sulzer spinning machines and shuttleless projectile looms considerably reduced costs and improved quality. About 30 per cent of Raymond's products have been exported in the last decade and the company is planning to increase this to 50 per cent.
The main export markets for the company are the PTA region and Europe. Within the PTA region, the company exports to Tanzania, Uganda, Rwanda, Zambia and Sudan. The UK has been the firm's largest export market in Europe and accounted for almost 50 per cent of its total exports in 1989 and 1990. The company has established marketing agents in India and Europe, which has enabled some of its products to reach France, Portugal, India and the UAE. It is also planning to export to the US.
The most important export items for the firm in 1990 and 1991 were blended and woollen tops, which accounted for 36 per cent of total exports, woollen blankets (27 per cent), trousers (17 per cent), fabrics (16 per cent), knitting yarn (4 per cent) and suits.
About 40 per cent of Rivatex's products, mainly kanga, are estimated to go to Tanzania indirectly. Two Mombasa-based Kenyan firms purchase 60 per cent of the total production from the firm and export 75 per cent of it to Tanzania. Direct exports by the firm have been low, around 5 per cent, since mid-1980s. Between 1983 and 1985 the firm established a substantial export market for its kanga fabrics in Oman. This market was, however, lost after 1985 due to the firm's inability to compete with products from the Far East in terms of price. For instance, while Rivatex was selling kangas at US$3.20 per pair, similar products from the Far East were selling at US$ 1.70 per pair. The firm attributed the lower price of the Far East products to the lower costs of labour and other key inputs there and to support from governments in terms of various concessions.
The total exports of the firm increased in the late 1970s, and early 1980s. This has, however, gradually been reversed except for indirect exports to Tanzania. The decline is attributed to the company's inability to improve its price competitiveness, partly due to inflexible labour arrangements, since the firm is not free to reduce the workforce, and partly due to lack of technological improvements or innovations over time. Another factor has been lack of aggressive export promotion. The failure of the firm to exploit the Tanzanian export market directly, leaving it to some of its customers, illustrates its lack of aggressiveness. This attitude is largely attributed to its status as a parastatal enterprise, whose incentives to export are not as strong as those of privately owned firms.
There were signs, however, that the firm had begun to give more attention to the export market after 1989, with Uganda being one of the main targets for export promotion. Uganda's own textile industry has suffered a major decline in the last two decades of political instability and foreign exchange constraints, and it has not been able to modernize its equipment. Although Uganda used to export textile products to Kenya in the 1960s and early 1970s, it is now increasingly importing these products from Kenya.
Rivatex's exports to the rest of the PTA region are insignificant and the company has not made serious efforts to penetrate the regional market. This is partly because they believe that the foreign exchange constraints in these countries would not allow significant trade to take place. A great deal of external trade in the region is tied to donor assistance, where foreign exchange is made available to import products from specified sources. It was also pointed out that local consumers from the regional markets had developed a taste for textiles from developed countries, making it difficult for the firm, like many others in the country, to penetrate the PTA market.
Other factors which had reduced the ability of Rivatex to expand its exports since the mid-1980s include rising local production costs and the depreciation of the Kenya Shilling, which increased production costs and the debt-servicing burden of loans denominated in foreign exchange. Between 1976 and 1992, the Kenya Shilling depreciated by more than 500 per cent against the Deutschmark -one of the currencies in which the loans to Rivatex were denominated. The firm had failed to inject new capital or to modernize its machinery. It had also suffered severe foreign exchange constraints and inadequate domestic supply of local top-level personnel skilled in textile technology, which had forced the firm to rely considerably on expatriate personnel, especially from India. Other constraints were the fact that textile technology is relatively new in the country, the limited training facilities in the industry and the flooding of the Kenyan market with second-hand textile products, often by firms associated with powerful politicians.
The sales department of the firm was also thinly staffed and weak. With only three people, the department was not able to pursue aggressive export promotion. The sales manager, based in Nairobi, was responsible for both domestic and export markets. Export promotion was generally not accorded high priority and was largely undertaken through personal visits by the sales manager.
Raymond, on the other hand, had a better-established and better-designed marketing strategy. It was more adequately staffed, more specialized and more focused. For instance, it had separate managers for domestic and export markets. This, coupled with its use of high-quality polyester-viscose raw materials and the relatively high productivity of workers, enabled it not only to have substantial exports in the region but also to export some of its products to some European countries.
Sunflag was established as an IS firm. In the 1960s it relied largely on second-hand technology from India to produce for the less-competitive, low-income local market. However, as it moved to the East African market and later to the PTA trading bloc in Eastern and Southern Africa it was compelled to upgrade its technology, especially in the processing stage, where semi-electronic machines were introduced in the early 1980s.
External factors affecting growth
Raw material problems
The raw material problems of the textile industry have been due mainly to inadequate foreign exchange allocations from the government, high import duties and the decline of the cotton industry in Kenya. These problems explain the low utilization levels at most textile firms in recent years.
By 1992 the production capacity of Rivatex had declined to an average of 1.2 million metres per month. In the first quarter of 1993 it was only able to achieve 900 000 metres per month, due to severe constraints in obtaining raw materials. The firm had not expanded its capacity since its inception. It is still using machinery originally bought from Germany. Due to mismanagement of the domestic cotton industry and disincentives experienced by farmers, only 40 000 bales were produced annually, although the firm needed about 120 000 bales. The firm relies heavily on imports of long-staple cotton from Egypt and medium staples from Uganda and Tanzania, with the latter accounting for 90 per cent of the imported cotton. There is, however, increasing competition for this cotton from local users in these countries, so that Rivatex and other Kenyan textile manufacturers find it more difficult to obtain their supplies.
Sunflag regarded lack of foreign exchange to purchase chips, dyes and other chemicals as one of the more serious problems affecting the performance of the firm. Although the firm had international suppliers for the necessary raw materials, they were becoming more sceptical of the firm's ability to obtain foreign exchange and were reducing credit facilities. The firm currently uses both cotton and synthetic fibres. Lines using cotton were more profitable in the early years, when the firm relied on local cotton supplies, but cotton utilization had fallen due to shortages.
Technology, productivity and human resources
Technology and design capabilities
Many firms in the Kenyan textile industry still maintain old equipment and use outdated technology in some of their operations. The inability of some of these firms to acquire modern technology is, to a large extent, due to the high cost of the equipment. This problem was more acute for government-owned firms. Having made no changes in the production process for a long time, some of these firms would have to replace their machinery and equipment completely, as well as retraining the workforce. Some of the firms interviewed expected this problem to become even more serious in the future due to the rapid depreciation of the Shilling in the 1990s. Raymond, however, did not suffer from these constraints. It had demonstrated that high-quality, special-finish blended fabrics were possible with new technology and that the productivity of equipment depended on the engineering and other labour skills available to the enterprise.
The relatively small size of the Kenyan market and the collapse of the East African Market in 1977 forced some textile firms, such as Raymond, to look beyond their traditional markets. As a result, the fastest growing export outlets during the 1980s were regional markets, especially in Rwanda, Burundi, Sudan and Zambia. Raymond indicated that its relative success in both domestic and export markets was due to its choice of modern technology. This required the use of experienced textile, mechanical and electronic engineers. The firm attached great importance to technology as a key to its export market.
Over the last 57 years of its existence, Sunflag has continually changed its technology in all production departments. In the weaving section, the firm uses Sulzer projectile looms. But in the early 1960s the firm began experiencing problems in the supply of its main raw material as a result of the establishment of more textile mills in the country. Government-owned mills had some advantages, as they received a larger share of cotton lint from the Cotton Lint and Seed Marketing Board than privately owned ones. In 1964, Sunflag established spinning ginneries for the manufacture of synthetic yarns, which considerably improved its range of knitted fabrics and garments.
The success of Rivatex's kanga exports to Tanzania was attributed to the quality and variety of kangas that the company offered.
Due to the relative specialization of the firm in kanga production, it was able to offer a much wider range of designs than many of its competitors in the region. The firm frequently conducts market research on kanga designs in order to keep abreast of changing customer tastes and sometimes uses consultants to develop new designs in line with changing fashions. Kangas are more than just garments, they have cultural and historical values and are also used as a store of wealth as well as for political and educational campaigns. Their print appeal has gone far and wide and they are now being used as gifts and souvenirs abroad and for many other tourism purposes.
Human resources and skill development
Modern textile equipment requires considerable skill to operate efficiently. The sample firms drew heavily on expatriate technicians as well as their international connections. Over time, a competent and disciplined indigenous workforce had been developed through in-house training, learning on the job and overseas training. On the shop floor, fairly high labour productivity is maintained through close supervision.
The less successful firms require upgrading of equipment, technical skills and marketing expertise. The firms indicated that the use of expatriates was inevitable now and in the future because changes in textile technology will largely continue to come from outside the country.
Raymond, one of the most successful exporters in the industry, has an elaborate training programme. The technical requirements for running the sophisticated equipment are enormous and the firm employed 32 expatriates out of a total of 1500 employees. These included 30 experienced textile engineers. The production managers indicated that trained labour was an important aspect if the firm was to achieve its production and export targets. Local employees were given rigorous training in the firm's training institute and some were sent to the parent company in India. Training was also vital if the firm was to exercise tight quality control, manufacture some of its spares, develop new fabrics and finishes and keep the mills operating at near-full capacity.
Sunflag, having been established before independence by an Indian parent company, was able to draw and benefit from management controlled and directed from India. Even after independence, this trend continued. Eight top managers, including senior textile technologists, were drawn from India and production and maintenance managers were expatriates. They influenced major management decisions on investment, expansion and pricing, a factor which considerably reduced the powers of local management.
One of the Asian managers justified the need for foreign managers by saying that, in a highly competitive sector such as textiles, it was necessary to have managers who best understood the machines, to avoid wastage, low output, loss of time, frequent breakdowns, mechanical and other difficulties. It was, however, evident that lack of trust in the local management had hindered the development of an 'industrial ethic'. As a result, there seemed to be little commitment, allegiance or loyalty from the workers to the industry. As many as 40 per cent of the firm's workers were hired on a casual basis, introducing considerable instability.