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Why many incentives may not help grow Kenya’s car assembly sector

By Charles Munyori | Sep 29th 2019 | 4 min read
By Charles Munyori | September 29th 2019

Latest official data shows that Kenyans are importing about 8,000 used cars every month. This is in comparison to about 500 new cars that are being sold on average in the country on a monthly basis.

This is happening amid concerted efforts by the government to offer heavy protection that includes huge tax exemptions to foreign automotive manufacturers through local assemblers and new motor vehicle franchise holders. The government is doing this in the belief that this will spur economic growth, create employment and become a key driver of technological advancement.

But is this approach the right prescription for the sector?

To better understand why Kenyans are buying imported used cars, I believe we need to revisit the 1960s and 1970s when Volkswagen pioneered the local motor vehicle assembly.

It assembled the then very popular Beetle model in Kenya, with the government faithfully providing protection to the vehicle assembly sector.

The sad fact is that all these very attractive incentives did not guarantee the success of the local assembly plants because most of them soon closed down and the few that survived never met the country’s demand for affordable and reliable cars.

Vehicle ownership become a rare privilege, reserved only for a few wealthy Kenyans, the government and aid agencies.

Lack of adequate capacity among the local assembly companies also saw a few Kenyans who could afford to buy the cars, pay for them and then put on to a waiting list for up to six months before delivery of their cars.

This was also the time the country witnessed a sudden rise in violent carjacking, which I believe was a direct result of a combination of these factors that made owning a car in Kenya almost impossible.

To remedy this situation, the government embraced trade liberalisation in the early 1990s. This included the importation of used cars. This important and eagerly awaited decision suddenly opened the world to Kenyans and enabled them to buy cars of their own choice, which were also within their budgets.

After a short period, imported used cars became so popular and the sector’s phenomenal growth soon took on a life of its own, creating in its wake a lucrative sector.

The used cars business is today providing decent livelihoods to millions of Kenyans including importers, clearing agents, matatu and taxi drivers, salespeople and mechanics and contributing close to Sh50 billion annually in taxes to the government.

But in a move that closely reminisces the 1970s, the government has over the last few years embarked on an aggressive campaign to promote and protect local automotive assembly by offering assemblers huge incentives that include tax exemptions.

Technological growth

It has also directed government agencies to procure only locally assembled vehicles. Although this is commendable, it should not be lost on the Government that Kenya has been assembling vehicles since the 1970s but to date, there is not a single iota of technology that has been transferred to the country.

It’s sad to note that in terms of technological growth, the country is still at the same spot it was in, in the 1970s.

Probably what the government needs to be reminded of is the fact that automotive markets in developed countries are today saturated and are characterised by overcapacity and low profitability.

This market has simply achieved full maturity and volumes are either stagnating or falling. The industry is also faced with stringent regulations on vehicle emission standards that are aimed at producing environmentally friendly and clean cars. That’s why many of these automotive manufacturers are rushing to build assembly plants in developing countries like Kenya and in the process essentially exporting obsolete and dirty technology that has been phased out in Europe, Asia and America.

What we are failing to realise is that this is just but a marketing strategy to enable these companies to gain a foothold and a market share in these countries.

Another obvious red flag that should make us worried is the deliberate and shameless misrepresentation of basic facts by these local assemblers to pass themselves off as automotive manufacturers (Kenya Vehicle Manufacturers Association) yet we all know they are vehicle assemblers.

There is no doubt that all these efforts are carefully aimed at misleading Kenyans into falsely believing that vehicle assembly and manufacturing are one and the same and that Kenya has suddenly attained automotive manufacturing status and the industry must not only be supported by the Government but also protected at all costs.

The government must not fall for this web of deceit. Instead it should change tack and henceforth insist that any engagement with organisations setting up automotive manufacturing and assembly plants should be on a very clear understanding that priority will be given to the systemic transfer of technology to our citizens and country.

This is because if left on their own, these organisations have zero motivation or obligation to share their technology with us. The government must also urgently put in place laws and policies that implement local content and a strict requirement that specific parts of products must be made using indigenous local materials.

Today, owning a car in our country is no longer a privilege but a basic necessity. Hence, the government must be very careful not to destroy the current vibrant market competition and free enterprise by creating a protected market for a few foreign multinational automotive manufacturers.

-The writer is the Secretary-General, Kenya Auto Bazaar Association.

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